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Speech of CIC Chairman in Washington

(chinadaily.com.cn)
Updated: 2009-04-01 17:15

I am confident in China’s future economic growth. Despite the severity of the current crisis, China will be one of the earliest countries to emerge from the distress. As an emerging market economy, China’s market system is not highly sophisticated, so there is still ample room for structural reform and demand expansion, which underlines opportunities amidst the crisis.

The US is fully geared up to combat the crisis from two fronts, namely stimulate the economy aggressively on the one hand, and strengthen balance sheets of financial institutions on the other hand. We hope the crisis would lead to forceful reforms, which would fundamentally improve the economic structure.

II. On the role of SWFs and foreign exchange reserves

The theme of this meeting is to discuss how to response to the crisis and its impact when managing SWFs and foreign exchange reserves. IMF and some other institutions have proposed several calculation methods to assess whether the size of foreign reserves is appropriate, such as the ratio of the reserve to short-term foreign debt, to M2, to corresponding monthly import, to total foreign debt, or to GDP, etc.

Those calculation methods may make sense in normal times, but not during the crisis. Take capital adequacy ratio of banks for example. In ordinary times, the required ratio is 8%. But when a crisis strikes, such ratio is far less than adequate.

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Therefore, whether the size of reserve is appropriate depends on the specific national conditions of a country. Let’s take a look at the East Asian countries. They maintained relatively large stocks of foreign exchange reserves or sovereign assets.

On the one hand, due to their tradition and culture, people of those countries tend to be thrift and save a lot. It is also related to the population structure of their current development stage. On the other hand, under the so-called Jamaica accord, foreign exchange reserves of considerable size are established to fend off and prevent transaction risks.

Especially after the 1998 Asia Financial Crisis, all East Asian countries increased their reserves by a large margin. It is a measure to guard against excessive global speculative capital flows which lack effective regulation. During the current crisis, large reserves have played a positive role for those countries to prevent the spreading of the crisis and to maintain stable exchange rates.

Based on lessons and experience learned from the practice of sovereign wealth funds of other countries, the Chinese government established the CIC in October, 2007. SWFs have existed for over half a century.

As a model of sovereign assets management, SWFs have made contributions to the economic growth and prosperity both to their host countries and to the recipient countries.

They are long-term investors, seeking long-term returns with controllable risks. Last October, representatives from 26 SWFs and IMF jointly drafted and adopted the Santiago Principles, which encapsulate SWFs’ basic features, governance structure and investment policies.

Those principles should help to strengthen the stability of global system and further safeguard the open investment environment and free capital flows. CIC participated in the joint drafting process, and is supportive of those principles. Meanwhile, we hope the principles could get positive responses from recipient countries of SWFs investment.

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