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I have been covering the
emerging trend of central banks "investing" their accumulated forex
reserves in equity markets. In the last few weeks it has become clear that
this idea appears to have moved from a proposal to a reality. This story is
getting relatively little coverage in the press, yet it has the potential to
be hugely disruptive of the functioning of capital markets, for reasons I
have outlined in my other writings (1 2 3 4). Some recent articles
on this topic are:
·
China
says it will stop accumulating FX reserves
·
China:
Investment won't hurt dollar
·
South Korea considers moving reserves
into foreign stocks
·
Central
Banks 'seek riskier assets'
·
China
to Create Huge Fund To Invest Part of Reserves
The problem with this proposal, that no one seems to
have picked up on, is that the assets they will be investing in -- equities
in particular -- are not mechanical black boxes that for some reason generate
a certain return. The return on the assets cannot be separated from their
role in allocating capital by private property owners, something that central
banks cannot do. While it would be possible for a small state-run agency of a
small nation to "free ride" on the reasonably efficient prices of
securities generated by private investors in the market, say by purchasing
broad-based indexes of all of the companies on a particular exchange, to the
extent that these exchanges come to be dominated by state-run agencies, they
no longer function as markets.
Robert Bradfoot, a management
consultant quoted by the AP, did begin to point out some of the public choice
problems that will occur when this plan is implemented:
The company will have to cope with political obstacles
stemming from its government ties, said Broadfoot.
He pointed to Temasek's
experience in Thailand, where it is embroiled in controversy over its
purchase of a controlling stake in a telecoms firm, and state-owned Chinese
oil company CNOOC Ltd., which dropped a bid to buy U.S. oil and gas producer
Unocal Corp. after criticism by American politicians.
"The controversies
will come when they get this body and it tries to behave like a private
financial institution but one that is government-owned," Broadfoot said.
"Its reception could be cool in a lot of the places that it tries to do
business."
Robert Blumen
Robert Blumen is an independent
software developer based in San Francisco, California
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