Smith and Nugee: The changing role of central bank foreign exchange reserves

From the Foreword by David Marsh:

This report by Gary Smith and John Nugée, two seasoned master craftsmen of reserve currency management, investigates the lessons learned from the accumulation of foreign currency reserves over the past 20 years. It is published at an intriguing time. After two decades of rises that the authors justly qualify as unintentional, unforeseen and unprecedented, official foreign assets around the world are starting to decline in many important countries, led by the biggest reserve owner, China.

This partly reflects a large shift of funds out of emerging market economies into the dollar in advance of the first rise in US interest rates for nine years. It is also the result of the sharp fall in the oil price which is one of the reasons for economic setbacks in countries like Russia, Venezuela and Malaysia, and has caused the governments even of the largest Gulf oil producers to dip into reserves to protect revenues. None of these recent developments counters the main assertion of the Smith-Nugée report, namely, that nearly all countries’ believe they need a far larger stock of reserves than earlier thought necessary as buffers against future turbulence.

Backing this contention, Smith and Nugée describe how some large economies with freely floating exchange rates, of which the UK is a foremost example, are making deliberate efforts to build reserves, both to bolster economic stability and also, in some cases, to add to the International Monetary Fund’s fire-power for international balance of payments assistance. The authors highlight an IMF report from April 2015 suggesting that developed countries as well as emerging market economies need to hold adequate reserves to guard against disorderly markets. Moreover, with the growth in the renminbi as a reserve currency, we have seen further significant moves towards the development of a multicurrency reserve system. This is likely to be still more volatile than the dollar- D-mark-sterling system that developed during the 1970s and 1980s and the dollar-euro system from the late 1990s – and thus provides yet another reason why reserves in future may continue to rise.

Smith and Nugée have chosen here to illuminate past trends as a way of exploring what may happen in the future. With the aid of reserve asset case studies among nations as diverse as China, Russia, the UK, Ireland and Iceland, the Smith-Nugée report provides new information on the wide and growing variety of uses to which reserves are put, and of the motivations for which they are held. The authors’ conclusion is that most countries will continue to practise the strategy of ‘self-insurance’ against turbulence, which will lead them to continue to acquire reserves – and find new ways of managing them. Once the world passes through the present phase of reserve weakness, the rebuilding seems likely to start anew.

 

Available for download here.

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Van der Zee: In between two societal actors – The responsibilities of sovereign wealth funds towards human rights and climate change

Abstract:

Sovereign wealth funds (SWFs) are long-time investment funds, owned by the government. They are able to exert influence on the behaviour of corporations through their investment policy. Due to the expanding number of SWFs, host states became concerned that investments by SWFs could be politically motivated. To ensure host states that an SWF has no political motivations, but merely seeks profit, the Santiago Principles were established. However, in a time where private actors are pressed to focus more on social values and becoming ‘socially responsible’, it seems strange that SWFs are pressed into a model of private behaviour with the objective of only maximizing financial and economic values and merely seeking profit. This paper explores the scope of responsibilities of SWFs towards social responsible investment (SRI). The paper provides a definition of SWFs, and examines the concept of socially responsible investment, the concept of fiduciary duty, and the concept of due diligence. Part of the study comprises an evaluation of 38 investment funds, which all qualify as an SWF as per the author’s definition of SWFs. Through desk research, the legal basis, governance structure and objectives of each of the SWFs were examined. Moreover, it was found that one quarter of the examined SWFs has adopted private regulatory regimes towards SRI. It is concluded that SWFs, due to their link to the state, are in a preferable position to become leaders in the sustainable investment field.

Available for download here.

Biggs: The state of public pension funding – Are government employee plans back on track?

Abstract:

The public-sector pension industry is claiming a comeback from losses suffered during the Great Recession. But this recovery is greatly exaggerated: even years past the end of the recession, most pension sponsors are unable to make their full annual contributions, and pensions are taking as much investment risk as ever. The first step to effective pension reforms is an honest, accurate view of the costs and risks that public plans impose on government budgets and taxpayers.

Available for download here.

 

Cheng: The Reform of the Corporate Duty of Care in China — From the Introspection of Delaware and Taiwan

Abstract:

The concept of fiduciary duty, derived from common law, was introduced to the Company Law of People’s Republic of China in 2005. The fiduciary duty plays an extremely important role in common law, particularly in U.S. corporate law. For this reason, one might have expected dramatic consequences from its introduction to Chinese law. In reality, however, few fiduciary lawsuits have been brought to the courts of China since 2005. There are three main reasons for the rarity of due care lawsuits. First, Chinese fiduciary law has neither clear content nor a practical enforcement. This is especially true of the body of fiduciary law that deals with the duty of care. This makes it difficult for lawyers to decide whether pursuing a due care lawsuit is worthwhile and for judges to establish a legal doctrine for applying and enforcing the law. Second, the traditionally harmonious culture of China discourages filing lawsuits against directors. Shareholders thus prefer other ways to solve problems, such as simply selling their stocks. Third, Chinese law imposes severe restrictions on derivative lawsuits. One such restriction is the requirement for shareholder(s) to have held at least 1% of company stock for at least 180 consecutive days in order to be eligible for filing a derivative lawsuit. This dissertation examines China’s problematic duty-of-care law and demonstrates that it is in dire need of revision by introspecting the duty of care in Delaware and the obligation of care of a good administrator in Taiwan. In any case, however, one cannot simply transplant a common law concept to civil law without also making a substantial effort to explain the law and adapt it to fit its new context. Otherwise, the law will inevitably suffer either from vagueness or ambiguity, both of which are sure sources of confusion. Therefore, the ambition of this dissertation is to provide the Chinese world a practical reform of the duty-of-care law that fits in the Chinese society.

Available for download here.

Caldecott & Rook: Investment consultants and green investment – Risking stranded advice?

Executive summary:

Investment consultants (ICs) play a key role as advisers to asset owners (AOs). They provide strategic advice to AO boards about asset allocation and develop plans for how AOs can achieve the performance they need to match liabilities. The advice from ICs is also used to construct mandates for asset managers and they often assess asset manager strategies and/or help AOs select asset managers for mandates. Examining these and other roles played by ICs makes it evident that they occupy a key position as ‘gatekeepers’ for many AOs, and that they operate at the interface between different parts of the investment ecosystem. As such, they are instrumental in determining whether innovative ideas are accepted or not by the financial community. This role as gatekeeper applies to products and services related to green investment1. Yet extensive formal and informal dialogue with diverse stakeholders suggests that: how ICs are engaging with their AO clients may not be accelerating innovation in and uptake of green investment practices. Instead, and in general, they seem to be hindering them. As a consequence of these observations from stakeholders, we inaugurated a project to investigate and understand what is happening and why.

Available for download here.

Min: Chinese State Controlling, Institutional Participation and Real Earnings Management

Abstract:

Early studies have showed that institutional investors help improve corporate governance by reducing the level of earnings management. Based on recent new measurement of earnings management, this article further studies whether institutional investors can help curb earnings management through real activities manipulation. The results show levels of real earnings management in Chinese state-owned companies are significantly higher than those in non-state-owned companies. Thus it indicates institutional investors have inhibitory effect on real earnings management, but their roles in state-owned companies have been restricted to a certain extent. The conclusions of this research have meaningful instruction to corporate  governance and reform of Chinese state-owned enterprises as well as reform of Chinese property rights system.

Available for download here.

Kong & He, Analysis on the Conduct of Managing Agent of State-owned Enterprises Based on Dual Reputation

Abstract:

The state-owned enterprise managers have a great feature, the operator is appointed by the superior government, the operators’ attention the relationship with administrative organization, the managers of state-owned enterprise have a strong consideration of reputation. The operator’s retention and promotion depends on the operator’s market reputation and political reputation. In the dual reputation, the operator behavior is divided into the normal behavior and the behavior of rent-seeking efforts, the operators maximize their expected utility through choosing their conduct. We analysis which factors influence the managers’ behavior, and study how to stimulate normal effort, reduce the rent-seeking behavior.

Available for download here.

Lebedeva & Feiguine: The Pension Systems in the Group of Seven Countries – The Current State, Prospects of Development, and References for Russia

Abstract:

This article discusses the pension systems in the member states of the Group of Seven (G-7). A comparative analysis of pension protection is provided. The emphasis is made on the basic to funded components ratio. The options for pension reforms are also considered. Based on the G-7 countries’ experience study, a conclusion is made on the prospects of reforming the pension system in Russia.

Available for download here.