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
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.”