The central bank yesterday voiced objections to a proposal to turn foreign exchange reserves into a sovereign wealth fund (SWF) aimed at stimulating the nation’s economy.
Academics have advised Premier Mao Chi-kuo (毛治國) to establish an SWF using foreign exchange reserves to generate higher returns that would benefit the economy as a whole.
“If an SWF is necessary, the government should first seek to pass a law for its establishment, management and oversight so it can operate legally,” the central bank said in a statement.
The government is seeking a remedy for the softening economy after exports plunged by 13.9 percent last month.
Foreign exchange reserves, which stood at US$421.4 billion last month, are intended to meet foreign exchange needs in case of payment shortfalls, the statement said.
With 73 percent of the sum held by foreign portfolio investors in the form of local shares and debts, the real operating amount is only about US$115.2 billion, the central bank said.
In other words, foreign exchange reserves are aimed at helping to regulate supply and demand in the foreign exchange market, the statement said.
Toward that end, safety and liquidity tops the list of concerns in the management of foreign exchange reserves, the central bank said.
An SWF on the other hand seeks to create more wealth that could be used to benefit the public, the monetary policymaker said.
An SWF is constantly eyeing higher returns through investment in global stocks, commodities, real estate, hedge funds and private equities and must therefore bear higher risks, the statement said.
“It is impossible to compare investment returns without factoring in the safety and liquidity of investment targets,” the statement said, responding to suggestions that foreign exchange reserves could be better managed.
The nation’s Labor Insurance Fund, Labor Pension Fund, National Pension Fund and Public Service Pension Fund serve as de facto SWFs despite not officially being acknowledged as such, the central bank said.
The funds have grown by an annual average of 15.4 percent for the past six years to NT$3.46 trillion (US$110.9 billion) in May this year and have accumulated a significant amount of foreign-currency assets, the central bank said, adding that the authorities concerned have held regular meetings to review the performance of the funds.
If an SWF wanted to buy assets denominated in foreign currencies, it had better secure foreign currencies through the foreign exchange market, the central bank said, indicating it would not have anything to do with a sovereignty fund if it came into being.
Overall, SWFs incurred US$600 billion of losses in 2008 following the global financial crisis — with the one in Norway eroded by US$90.7 billion, or 25 percent of the fund size, the statement said.
The central bank cited its peer in Hong Kong as emphasizing it would continue to manage foreign exchange reserves in a prudent and conservative manner because the fund is the last-line defense in maintaining the nation’s financial stability.
SWF operations have caused disruptions to economic and financial stability in some smaller countries because of the huge sizes of the funds, the central bank said.
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