Investment markets are in line for a fresh boost of liquidity as Asian governments begin to actively manage the massive reserves of foreign exchange they have accumulated.
The prospect of big new investment players entering the market has been welcomed by some analysts as an additional source of liquidity that will underpin demand, but raise alarms among others who fear that political agendas may be pursued on financial markets by 'sovereign wealth funds' (SWFs).
The rise of the funds is partly due to the trend of the United States dollar's decline and the resulting intervention on foreign exchange markets by Asian central banks to stem the appreciation of their currencies against the dollar and keep their export engines running and, more directly, the result of the sustained trade surpluses generated by Asian exporters.
The combined outcome had been the accumulation by Asian central banks of total reserves in excess of US$4trillion, noted the International Monetary Fund in its October report Regional economic outlook - Asia and Pacific, with China accounting for the bulk of this year's growth because of its surging trade surplus (see table). Reserves of this level were well above what may be needed to grease the wheels of the financial systems of many central banks, so the banks were now considering the launch of SWFs, noted the IMF.
'The objective of these entities is to increase returns on foreign currency holdings, although in some cases, for example South Korea, they have a secondary objective to help develop local capital markets,' it noted.
Singapore was one of the first countries in Asia to set up a sovereign wealth fund. Temasek Holdings, part of the government of Singapore's investment arm, now manages a portfolio of assets worth more than US$100billion.
Among the sovereign investors that will begin to exert growing influence on the investment scene will be: The China Investment Corporation, established earlier this year and which could deploy up to US$200billion of the country's US$1.4trillion of official reserves; The Korea Investment Corporation, capitalised in 2005 with funds of about US$20billion to invest on behalf of the Bank of Korea and the South Korean government; The Australian Government Future Fund, established in May last year, with an initial transfer from government budget surpluses of A$18billion (HK$126.84billion).
