Chinese Ponder Focused Sovereign Wealth Funds

"No matter how rich you become, how famous or powerful, when you die the size of your funeral will still pretty much depend on the weather."

Michael Pritchard, author

What do you do when your ostensibly U.S. $ denominated $3.05 Trillion FOREX reserves keep growing, and at the same time as the purchasing power keeps on falling? This is the dilemma facing the Chinese.

Asset allocation is only one side of the problem. Yes, one answer is to establish other SWF vehicles to invest in profitable asset classes not susceptible to this falling purchasing power effect - invest in hard assets and energy. But that still does not explain away another more fundamental issue - the fact that virtually every other asset class is still quoted in U.S. $ terms whether it is oil, gas, gold, or copper.

The fact that more institutions like CIC (=Chinese Investment Co.) will likely be established, a more fundamental issue for Asian investors going forward will be to agree to some sort of currency basket with which to price these global assets. This is the real issue which takes time and political will to make it happen. And for it to really work it requires a substantial re-working of the current Chinese FOREX policy.

Expect behind the scenes diversification by Chinese to keep a substantial institutional buyer in the market to prop up a wide range of commodities including base metals and precious metals for the forseeable future. Demand will continue to outstrip demand imbalance as the commodity and energy bull run continues apace.

If correct, this thesis suggests that other smaller private investment vehicles should also invest in commodities (directly or indirectly) and that there should be a push by the region's exchanges to provide more hedging and liquidity across major commodity futures vehicles. This appears to be a secular shift taking place rather than solely a cyclical one that has naysayers calling for a "commodity crash". Interesting times ahead as hedge funds plus Chinese stay long and rest of the whole gets caught in a short squeeze as the much anticipated collapse fails to materialize. Mahalo.