China’s Pessimism

Giant sovereign wealth fund gets real.

April 19, 2011

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523262_good-luck_coinsFor all the optimism about a global economic recovery in 2011, the leaders of China’s two main SWFs are rather pessimistic about the future prospects for the global economy. At the recent Boao Forum, the CIC’s Lou Jiwei (and others) complained about the “rich world” and the burdens they were placing on them. In addition, Dai Xianglong, who is head of China’s National Social Security Fund, also expressed negative views. What’s with all the pessimism?

Off the top of my head, the following are sort of problematic for the global economy: High oil prices. Natural disasters. MENA instability. European debt crisis. US property double dip. US sovereign outlook. Emerging market inflation. Global infrastructure deficit. European demand. European banks. US states’ budgets. Entitlements and an aging population. Unfunded pension liabilities. Donald Trump for President.

You gotta admit, it’s all rather grim. And, if the global economy does start to slow, it’s hard to see what policymakers can do about it. Stimulus funds? Nope. QE3? Hard to imagine. Tax cuts? See deficits.

So this brings us back to the sovereign funds. With the global economy facing some serious headwinds again…and the West seemingly powerless…I’d wager SWFs will soon be asked to play a role they desperately dislike: savior of the global economy.

But, to use the Boao Forum’s slogan, such a role could be a “win-win” for Asia. These funds could step in and provide much-needed capital to certain companies and sovereigns, which could help avoid destabilizing bankruptcies or defaults. And, in theory, the SWFs would receive a very good price for these distressed assets, which means that, over the long-term, these investments could end up being quite profitable. After all, conventional wisdom would say successful long-term investors (i.e., inter-generational investor) are contrarian. These funds would get credit for saving the world economy from collapse while also profiting from it. Now that’s what I’d call win-win.

But there’s one problem, as this scenario could require sovereigns to sell their Treasuries to buy distressed assets. How would that effect US borrowing costs? Would Treasuries still be viewed as a safe-haven? In short, we may be in for some stormy times ahead.

This post originally appeared on the Oxford SWF Project website.

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