Interesting View On The Central Banks

The New 900-Pound Guerillas

Traditionally, central banks of emerging economies have invested in stable, low-return, highly liquid assets such as U.S. government T-bills that provide flexibility in terms of managing the local currency. However the massive growth in global foreign exchange reserves in recent years has pushed these public entities into the private equity market in the quest for higher returns from their excess capital. According to the U.S. Treasury, the growth in global foreign exchange reserves including gold have grown at a rampant 20% annual average rate since 2002, compared to 6% from 1997 to 2001. Global foreign exchange reserves held by governments is estimated to be around $5.6 trillion, with an additional $1.5-$2.5 trillion held in “sovereign wealth funds.”When tallied up, therefore, the total amount of foreign assets held by governments would approximately be $7.6 trillion or 15% of global GDP. The trend toward large-scale investments in private equity by foreign state banks, a trend which has gained considerable momentum in recent months, has the potential to change the whole scope of global financial markets. Simply, these banks and their minion-funds have the opportunity to bid up virtually any financial asset, whether it be for financial or political gains. Recent investments such as the $3 billion invested into Blackstone by China or the $21.8 billion takeover bid by Qatar for the British supermarket chain J Sainsbury last week, contain the seeds of serious political ramifications. Not only can the new money-bags move markets, up or down, in a big way… but, as commented on in a recent edition of this column, the attempt to unload some of their cash for tangible assets can and already is causing some serious talk of protectionism We mention this again here, because it is a powerful new force in the market and one to keep a very close eye on.