Fri, Nov 23, 2012 - Page 8 News List

A sovereign wealth fund would be a poor policy

By Lin Kien-tsu 林健次

Because of poor monitoring and slack operation of Taiwan’s four major funds — the Labor Insurance Fund, the Labor Pension Fund, the Public Service Pension Fund and the Postal Savings Fund — Minister of Finance Chang Sheng-ford (張盛和) has proposed setting up a new fund, similar to a sovereign wealth fund. This is truly a frightening idea.

The world’s major sovereign wealth funds are mostly based in oil-producing countries or countries that are less democratic, have no need for accountability or lack political transparency, such as China or Singapore.

Apart from the government being the major shareholder in sovereign wealth funds, their content and operations are like that of private equity funds. The main business of private equity funds is not investing in listed stocks, stock markets or government debt. Their strategy is to purchase a large share in a company and then get involved in its operation, management, restructuring and acquisitions.

If business improves, they repackage the company, selling its stock for a large profit. This is financial gambling for huge stakes. The operational strategies and lack of transparency of these funds are also characteristic of sovereign wealth funds.

The two major Singaporean sovereign wealth funds — Temasek Holdings and the Government of Singapore Investment Corp — are prime examples of this modus operandi.

It is clear why Taiwan is not suitable for such a fund.

First, sovereign wealth funds control huge investment power and many channels for transferring benefits, and their lack of operational transparency is a source of corruption. The Chinese Nationalist Party (KMT) and the Democratic Progressive Party accuse each other of corruption, and the KMT has huge party assets. While the KMT’s offshore funds have not been thoroughly accounted for, the emergence of a sovereign wealth fund would raise many questions.

Second, sovereign wealth funds are very risky and can lose money quickly. In 2007, the Chinese sovereign wealth fund, China Investment Corp, invested US$3 billion in the Blackstone Group’s private equity fund. Within half a year, they had lost more than half of that amount. Taiwan is not an autocracy like China and it cannot allow government officials to mess around with its money.

Third, because sovereign wealth funds lack transparency and are so powerful, they often upset market operations and become involved in the economic affairs of other nations. They are therefore not welcomed. Former French president Nicolas Sarkozy and German Chancellor Angela Merkel have both issued warnings against this in the past.Taiwan is a comparatively weak country and a sovereign wealth fund would invite pressure from international interest groups and political predators. In short, it would just be asking for trouble.

Finally, if a Taiwanese sovereign wealth fund did not engage in overseas investment, and restricted itself to domestic activity, it would become linked to local businesses. The fund would become a “hot piece of economic action,” creating conflict and disputes between various powers, and this would not be beneficial to the development of a normal political and economic climate.

The main problems with Taiwan’s four major funds are slack management and monitoring, under-the-table operations and ill-advised planning. Reform should address these issues.

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