Asian Central Banks: A Future Force to be Reckoned With
"He who will not economize will have to agonize."
Confucious
A recent report by the consultant McKinsey highlights the growing financial muscle of Asian central banks. In my opinion this will extend beyond their current impact in the foreign exchange and U.S. Treasury markets where they have been very active.
The report is entitled "The New Power Brokers: How Oil, Asia, Hedge Funds and Private Equity Are Shaping Global Capital Markets".
The size of the issue is as follows. At the end of 2006 Asia's central banks (excluding Russia) had foreign-exchange reserves of around US$3.1 trillion. This compared to US$1 trillion in 2000. Mckinsey estimates that this figure will rise 42% to US$5.1 trillion by 2012 or by a US$300 million pace per year over the next 5 years.
The central banks of China and Japan held US$1.1 trillion and US$875 billion as of end 2006. They were followed by Hong Kong-SAR, India, Malaysia, Singapore, South Korea and Taiwan which together held about US$1 trillion.
As to the likely motivation of Asia's central banks, the report goes on to emphasize the following: that they have few to no set liabilities; they comprise few investors; they can provide stable capital flows with no withdrawals; they have little to no need to generate cash flow; and, they have no limitations on asset allocations.
A key trend of many Asian central banks is likely to be the political decision to use these reserves for government investment funds seeking higher returns. This has already been put forward by China and the experience and approach of Singapore is probably the most advanced.
The growth and size of Asia's central bank liquidity is going to impact hedge funds - either directly in the sense that they themselves invest in single managers (either international or in the region) or indirectly, via fund of hedge funds for their diversified returns. Let's not forget that central banks have, in the past, been investors in firms such as LTCM and Vega too!
Another approach may be to eventually see some of these entities buying into the equity of alternative investment firms in the same way that China bought a recent 20% share of a prominent U.S. private equity/hedge fund of fund operator. Yet another approach may be to buy into the ownership of various exchanges where a great deal of hedge fund levered transactions take place.
Either way, Asia's central banks are likely to increase the demand for ever scarce quality capacity in the industry. They may also supply liquidity justwhen many players want to get some enterprise value at, presumably at or near the top of the market. After all, when did an hedge fund or private equity shop ever not think about timing when it comes to pricing an asset, especially when it is their own firm. Mahalo.
"He who will not economize will have to agonize."
Confucious
A recent report by the consultant McKinsey highlights the growing financial muscle of Asian central banks. In my opinion this will extend beyond their current impact in the foreign exchange and U.S. Treasury markets where they have been very active.
The report is entitled "The New Power Brokers: How Oil, Asia, Hedge Funds and Private Equity Are Shaping Global Capital Markets".
The size of the issue is as follows. At the end of 2006 Asia's central banks (excluding Russia) had foreign-exchange reserves of around US$3.1 trillion. This compared to US$1 trillion in 2000. Mckinsey estimates that this figure will rise 42% to US$5.1 trillion by 2012 or by a US$300 million pace per year over the next 5 years.
The central banks of China and Japan held US$1.1 trillion and US$875 billion as of end 2006. They were followed by Hong Kong-SAR, India, Malaysia, Singapore, South Korea and Taiwan which together held about US$1 trillion.
As to the likely motivation of Asia's central banks, the report goes on to emphasize the following: that they have few to no set liabilities; they comprise few investors; they can provide stable capital flows with no withdrawals; they have little to no need to generate cash flow; and, they have no limitations on asset allocations.
A key trend of many Asian central banks is likely to be the political decision to use these reserves for government investment funds seeking higher returns. This has already been put forward by China and the experience and approach of Singapore is probably the most advanced.
The growth and size of Asia's central bank liquidity is going to impact hedge funds - either directly in the sense that they themselves invest in single managers (either international or in the region) or indirectly, via fund of hedge funds for their diversified returns. Let's not forget that central banks have, in the past, been investors in firms such as LTCM and Vega too!
Another approach may be to eventually see some of these entities buying into the equity of alternative investment firms in the same way that China bought a recent 20% share of a prominent U.S. private equity/hedge fund of fund operator. Yet another approach may be to buy into the ownership of various exchanges where a great deal of hedge fund levered transactions take place.
Either way, Asia's central banks are likely to increase the demand for ever scarce quality capacity in the industry. They may also supply liquidity justwhen many players want to get some enterprise value at, presumably at or near the top of the market. After all, when did an hedge fund or private equity shop ever not think about timing when it comes to pricing an asset, especially when it is their own firm. Mahalo.
posted by Franklin Scruggins | 7:56 AM
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