Should there be common standards for Sovereign Wealth Funds in Asia?

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Sovereign Wealth Funds (SWFs), government owned investment vehicles typically funded by foreign exchange surpluses or natural resource revenues seem to be in the news about everyday.  Their massive size, rapid growth, and high-profile investments in the U.S. and elsewhere in 2007, has generated this attention.  Some of the SWF investments have been viewed as market stabilizing, for instance the substantial equity investments in large U.S. financial institutions that recently got into financial trouble after the sub-prime mortgage crisis.  However, there is great suspicion from many quarters of the SWFs as being politically motivated and the SWFs currently at the center of the storm are in Asia.   

Concerns on SWFs:  Much debate is now taking place, both in academic and political circles. Politicians and financial officials from the U.S., United Kingdom, France, Germany and others have called for more intensive scrutiny of SWF investments.  This call has come due to three reasons:  (i) SWF investments could potentially be used to exert economic influence and to acquire strategic assets; (ii) a perceived lack of transparency of SWF operations; and (iii) seemingly opaque corporate governance structures.   These concerns have been amplified during this moment in financial history when the economies of the investee countries are increasingly vulnerable. 

Landscape of SWFs in Asia:  Although SWFs have become a favorite of the financial press and some politicians, what does the SWF landscape really look like?  Asia is an ideal region to take a look at this question since it has the full range of funds – from long-established funds to brand new funds; from passive portfolio investors to more aggressive strategic investors; from resource-backed funds to foreign reserve-backed funds; and based in highly developed economies to the poorest economies in Asia.  The table below provides a sampling of the diversity among SWFs in Asia.  In looking at the landscape, the defining factor for a SWF is that it is a separate entity from the line ministries or government agencies.  Otherwise, the list of SWFs in Asia would be greatly expanded to include central banks, pension funds, and the universe of government-owned financial institutions.  

Country Fund Established Value
(US$ billion)
Australia Australian Future
2005 55 Fiscal
Brunei Brunei Investment
1983 30 Oil and gas
China China Investment
2007 200 Foreign
China State-owned Assets
Supervision and
2003 2,000 Legacy state
Timor-Leste Timor-Leste
Petroleum Fund
2005 2 Oil and gas


2005 20 Foreign
Malaysia Khazanah
1993 26 Fiscal surplus/Legacy state ownership A D
Singapore Temasek
1974 159 Fiscal surplus/Legacy state ownership H D/I
Singapore Government
1981 330 Foreign reserves H I
Vietnam State Capital
2005 2 Legacy state ownership A D
Data Source:  Sovereign Wealth Fund Institute,
* A = Active Investor making strategic equity investment positions, P = Portfolio Investor making financial investments, and H = Hybrid Investor that does both active and portfolio investing.
** D = Primarily Domestic investments, I = Primarily International investments.

Minimum Standards for SWFs in Asia:  With this basic understanding of what the SWF landscape looks like in Asia, the core question is what should be done to address the three main concerns that SWFs invoke internationally?  It seems increasingly clear that if SWFs do not make some changes soon, international resistance to their investments and questions from their domestic constituencies will rise.  So, it seems that there are three priority issues for SWFs and their supervisors in Asia to consider tackling in the very near future: (i) ensuring that there is a level playing field for investments by SWFs at home and abroad; (ii) increasing the transparency of the funds; and (iii) enhancing the corporate governance structures of SWFs.

First, each SWF in Asia has a different investment approach and therefore, it seems unlikely that a “one-size-fits-all” approach will work well.  In terms of regulation, it could be argued that this is a level playing field issue – SWFs should be treated as all other similarly positioned investors in both domestic and international markets.  For example, some of the SWFs in Asia are investing domestically as strategic shareholders in large, formerly state-owned companies (i.e., Khazanah of Malaysia), although some are becoming much more aggressive in international markets (i.e., Temasek Holdings of Singapore).  In either case, their mode of operation most approximates private equity funds and could be regulated as such in the markets in which they invest – home or abroad.  In contrast, some of the SWFs in Asia are passive financial investors in international markets (i.e., Brunei Investment Agency) and could be treated as foreign portfolio investors.  Finally, there are SWFs that have a hybrid type of investment strategy that straddles both types of investment with both domestic and foreign investments (i.e., General Investment Corporation of Singapore), in which case the regulatory approach is a bit trickier, but could be done on the basis of the primary mode of investment or on a case-by-case approach.

Second, clearly there is an immediate transparency concern at hand with the SWFs in Asia Many do not have public accounts, annual reports, or useful detailed information on their operations.  The solution to these issues appears to be relatively simple – increasing the disclosure of quality information.  The key concept to keep in mind is that the SWFs are acting as a public trust for the funds of the governments and by extension the people and thus, should be accountable (by law) for their actions. This accountability ideally should also take a public, transparent form in periodic reports regarding their activities and the submission to annual, independent audits of their activities. Such disclosure could also include the SWF’s overall investment strategy, financial condition, and performance against specified objective benchmarks. A few SWFs around the world are already doing these things, including Temasek Holdings of Singapore, and are providing possible models for other SWFs to follow.

Third, some SWFs in Asia also have murky corporate governance structures.  The principle to be applied in this case is operational independence of the SWFs and this should be enshrined in the governing laws and regulations surrounding the SWFs.  The SWFs should have a clear legal form as a corporation, investment fund, etc. and have a commercial mandate.  The state’s role should also be defined with respect to key issues, such as voting rights, electing and removing board members, information flows, and strategic direction.  Another consideration for SWFs is to put into place appropriate risk management and internal controls.  These actions would constitute the bare minimum requirements that will probably be expected of Asian SWFs both domestically and internationally in the near future. 

Pressure to go Beyond the Minimum:  The International Monetary Fund, the Asian Development Bank (pdf file), the Organization for Economic Cooperation and Development, and others are actively exploring the idea of establishing international standards for SWFs.  The World Bank has not (yet) entered the policy debate on SWFs, but it does offer technical assistance to SWFs.  The European Commission is reportedly developing a voluntary code of conduct for SWF governance and transparency which is due out next week.  The U.S. Treasury Department has recently issued a paper and a high-level speech on the role of SWFs and possible policy responses and various Congressional hearings have been held on the matter.  A think tank has developed a “scorecard” for SWFs (pdf file) and a lobbying / public relations organization has even been set-up in Washington, DC to advocate and communicate on behalf of foreign SWFs in the U.S. 

Questions for Asian SWFs to consider:  For good or bad, it is clear that SWFs are here to stay and there seem to be minimums that SWFs should move towards to address the legitimate domestic and international concerns about their operations.  However, should there be one set of “best practices” or a common code of conduct for all SWFs in Asia and beyond?  If so, how far should these standards go and who would monitor and enforce them?  Should there be different standards for different types of SWFs?  Should the SWF industry develop standards or codes of conduct on its own?  Will such standards hinder the flow of (now needed) investments from SWFs into key markets?  Should this issue be handled on a bilateral basis?  Although some action is ongoing by international organizations (i.e., IMF, OECD, etc.), should they be even more involved in this area?  Or, should the issue of common standards simply be dropped altogether?  


James Seward

Senior Financial Officer

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