The Asian Funds
The major Asian funds in China and Singapore represent a unique category of fund in that they are the only major sovereign wealth funds (SWFs) that do not derive their capital from a commodity surplus. The major Middle East and European funds accumulated large surpluses due to oil exports, while China and Singapore derived theirs from current account and fiscal surpluses. From 1999 to 2008, China managed a fixed exchange-rate regime during a period of rapid economic growth by enjoying a cumulative current account surplus with the United States of more than $1.7 trillion.1 China created its SWF, the Chinese Investment Corporation (CIC), from foreign exchange reserves by allocating $200 billion from its accumulation of more than $2.4 trillion. The driving factor behind the Chinese current account surplus is the fixed exchange-rate regime at an artificially low rate, stimulating rapid export growth and sterilization of the capital account surplus by resulting in large foreign exchange reserve accumulation. Though the Chinese Central Bank holds $2.4 trillion in foreign holdings, between real exchange-rate appreciation and inflation, the losses totaled approximately $200 billion per year. To break even in real terms from its capital base, the CIC would need to realize annual gains of nearly 10%. The growth of Chinese foreign exchange reserves and the subsequent creation of the CIC coincided with the ascent of China to a superpower status. Where small oil-producing states of less than one million people can run large current account surpluses with fixed exchange rates and can maintain relative anonymity, China and the world began to grapple with the imbalances and changes to the world economy stemming from the country’s rapid growth and fixed exchange-rate regime.
Singapore created its SWFs, Temasek Holdings (Temasek) and the Government Investment Corporation of Singapore (GIC), from current account and fiscal surpluses. Through managing a fixed exchange-rate regime until 1971, only a few years before the creation of Temasek in 1974, Singapore ran continued fiscal and trade surpluses that, like China, led to the establishment of its two SWFs. Even after the creation of the GIC in 1981, Singapore engaged in a sustained government policy of forced public saving. For instance, from 1980 to 2005, Singapore ran cumulative fiscal and current account surpluses of 176% and 226% of GDP,
1 This is the author’s own calculation and is derived from Bureau of Economic Analysis data.