SovereignWealthFunds15:Maquetación 1 20/10/15 17:57 Página 50 SovereignWealthFunds15:Maquetación 1 20/10/15 17:57 Página 51 Different Twins and a Distant Cousin: Sovereign wealth funds in Hong Kong, Singapore and South Korea Juergen Braunstein PhD Candidate at London School of Economics and Affiliate Researcher at The Fletcher School, Tufts University SovereignWealthFunds15:Maquetación 1 20/10/15 17:57 Página 52 6. Different Twins and a Distant Cousin: Sovereign Wealth Funds in Hong Kong, Singapore and South Korea1 Hong Kong and Singapore have some of the oldest and largest Recurring balance of payments surpluses allows the accumulation SWFs. They are under the top 15 SWFs in terms of size and have of foreign exchange reserves. Foreign investors in Singapore convert become role models for other SWFs to follow. While most of the their foreign currencies (e.g. US $) into local currency (i.e. Singapore SWFs arise from commodity wealth, Hong Kong and Singapore’s $) through banks, which again exchange the foreign currency (e.g. SWFs arose out from years of conservative fiscal policy resulting in US$) with the Monetary Authority of Singapore (MAS) for domestic fiscal surpluses, internal fund transfers, foreign exchange currency (i.e. Singapore $). A strong foreign demand for Singapore interventions. $ can add to a rapid and uncontrolled appreciation of the Singapore $. To smoothen appreciation of the Singapore $ the MAS can Similar to Singapore, Hong Kong’s government deposits its intervene by injecting Singapore $ into the system through the surpluses and reserves with its SWF, the Hong Kong Monetary purchase of foreign currencies (e.g. US $). By doing this the MAS Authority Exchange Fund. Also Hong Kong’s monetary base is again acquires foreign exchange reserves. The final way through backed through foreign currency held by the Exchange Fund. In which Singapore accumulates foreign exchange reserves relates to addition to that it also holds the assets of Hong Kong’s former Land its high saving policy and non-sterilised foreign exchange Fund. Between the mid 1980s and late 1990s half of the premiums interventions. Through Singapore’s high saving policy (i.e. generated in Hong Kong through the sale of land were allocated Singapore’s mandatory Pension Fund, and Singapore’s public into the Land Fund.2 The Land Fund grew especially during the surpluses) liquidity is constantly withdrawn from the system and property boom in the 1990s.3 thereby putting constantly substantial pressure on the Singapore $ to appreciate too erratic and too fast. To smoothen the appreciation A significant part of Singapore’s sovereign wealth is attributable to of the Singapore $ the MAS intervenes by selling Singapore $ in its foreign exchange interventions. These took interventions took exchange for foreign currency (e.g. US $). Together these three place via three channels: the balance of payments channel, the processes “have led to a prodigious growth in Singapore’s foreign foreign investment channel, and the domestic saving channel. reserve over time.”4. Table 1 Sovereign Wealth Funds in Hong Kong and Singapore & country GDP As part of Type of SWF Size of SWF country’s GPD SWF name mandate Est. in US$bn (PPP) In percentage Singapore GIC Pte Ltd Saving 1981 320 70.7 Temasek Development 1974 167.4 37.0 Monetary Authority of Singapore Stabilisation 1971 273* 60.3 Hong Kong Hong Kong Exchange Fund Saving/Stabilisation 1935 414.6 104.3 South Korea Korea Investment Corporation Saving/Development 2006 85 4.7 Source: Calculation based on ESADEgeo (2015) and CIA Factbook (2015). * This amount refers to the official reserves. 1 Because of their striking similarities in terms of history, economics Hong Kong and Singapore have been regularly described as twins or cousins. 2 “The Land Fund was created in 1986 under a Sino-British arrangement that recognized Chinese worries that the British administration would sell too much land before the handover and divert funds to British interests. Therefore, whenever the colonial government sold property in the territory, proceeds would be split 50-50 between the government and the Land Fund, officially known as the Hong Kong Special Administrative Region Government Land Fund (Asian Wall Street Journal, 15 May 1997, p.8).” 3 Dow Jones International Media, 30 Nov 1995 4 MAS (2011) MAS 40th anniversary book, Monetary Authority of Singapore. Sovereign wealth funds 2015 Different Twins and a Distant Cousin: Sovereign Wealth Funds in Hong Kong, Singapore and South Korea 52 SovereignWealthFunds15:Maquetación 1 20/10/15 17:57 Página 53 What is the special thing about SWFs in small open economies like Its purpose was to safeguard the exchange value of the Hong Kong in Hong Kong and Singapore, is these are the largest SWFs Dollar through foreign currency backing. Later it became central in worldwide in terms of total asset size vis-à-vis domestic GDP. South sustaining the integrity of the monetary and financial system in Korea’s KIC, for example, is much smaller in relative terms to South Hong Kong. It was regularly used to build confidence by supporting Korea’s GDP. Hong Kong’s stock exchange during banking and stock market crisis. For example, in the mid 1980s banking crises the Hong Kong Small open economies like Hong Kong and Singapore are highly authorities drew on the Exchange Fund to bail out domestic banks. exposed to international economic developments and their SWF Likewise during Asian Financial Crisis 1997 and the Financial Crisis adjust accordingly. Unlike larger economies, such as China, the 2007/2008 the Exchange Fund was used for acquiring substantial option of reverting to domestic investments, without creating parts of the domestic equity market in order to avoid a collapse of bubbles is limited for small open economies with SWFs. This makes the Hong Kong stock market. For example, on the 7th of Sept 2007 international equity investments specifically attractive as a means of the Hong Kong Exchange Fund expanded its share from 2.5% to risk diversification for small open economies. 5.9% at costs of HK$313 million converting itself in a minority controller of the Hong Kong Stock exchange.6 Following the large- This article will briefly discuss the Hong Kong Monetary Authority scale interventions in 1997 and 2007/2008 the Hong Kong and the Monetary Authority of Singapore – two large sovereign government created investment corporations in order to liquidate asset managers which have received little attention in the SWF the equity stakes of the Exchange Funds in an orderly fashion. debate. Then it focus on the Government Investment Corporation and Temasek and by looking at some of the recent developments, Over the years the volume of the Exchange Fund has grown beyond particularly with regard to Temasek’s activity with startups and GIC’s what was needed to cover the value of the Hong Kong $ in foreign activity concerning real estate. Recent developments stand at the currency.7 For example, as of February 2015 Hong Kong has foreign end of a long process. Therefore, it is useful to briefly map their past currency reserves of US$332.5 billion, which is equivalent to seven trajectory and analyze their overall asset portfolio today. times the currency in circulation.8 In order to manage such a huge amount of international reserves, Hong Kong has historically relied Lineal ancestors: The Hong Kong Exchange Fund & the in both internal and external managers. Internal managers Monetary Authority of Singapore comprises HKMA staff in the Reserve Management Department managed in 2010 around 80% of the Exchange Fund’s assets The Hong Kong Exchange Fund internally whereas in 2013 this decreased to 75% (including the “backing portfolio” and part of the “investment portfolio”).9 This The Hong Kong Exchange Fund and the Monetary Authority of suggests that the HKMA is gradually outsourcing investment Singapore are the earlier ancestors of the Hong Kong Monetary responsibilities to external managers.10 Appointing external Authority (established in 1993) and the Government Investment managers with good track records allows the HKMA to benefit from Corporation of Singapore (established in 1981). Created in 1935 different investment expertise, knowledge transfer, and information under the Hong Kong Exchange Fund Ordinance Cap 66 the Hong from market to in-house professionals.11 Kong Exchange Fund was originally an account of the government. In 1993 the Exchange Fund was reallocated under the auspices of the newly created Hong Kong Monetary Authority (HKMA). Interestingly, the HKMA refers to a person (i.e. the Chief Executive of the HKMA) and not to a corporation.5 The HKMA is held responsible for the management of the Exchange Fund, and it is supported by the Exchange Fund Advisory Committee, which acts as a Board. 6 Available: https://www.hkex.com.hk/eng/exchange/invest/mc.htm 7 Assets held by the Government’s general reserve account as well as the assets of Hong Kong’s Coinage Fund and later also the Hong Kong’s Land Fund were placed into Exchange Fund. 8 Available: http://www.hkma.gov.hk/eng/key-information/press-releases/2015/20150306-3.shtml 9 HKMA Annual Report 2013 10 HKMA Annual Report 2010 5 See Exchange Fund Ordinance, Chap 66/Section 5A Appointment of Monetary Authority 11 Ibid Sovereign wealth funds 2015 Different Twins and a Distant Cousin: Sovereign Wealth Funds in Hong Kong, Singapore and South Korea 53 SovereignWealthFunds15:Maquetación 1 20/10/15 17:57 Página 54 6. Different Twins and a Distant Cousin: Sovereign Wealth Funds in Hong Kong, Singapore and South Korea The assets of the Exchange Fund are managed as four portfolios: Confronted with declining return on traditional assets, they decide the Investment Portfolio, the Long-Term Growth Portfolio, the to enter new asset classes with the aim of increasing returns.16 Since Strategic Portfolio and the Backing Portfolio.