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Should we hire externally hired managers in forex reserve investment? |
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19:54, June 28, 2007 |
To solve the excessive foreign exchange (forex) reserve problem, China is preparing to establish a state forex investment company. Besides creating important systems and making policies, whether should one hire an experienced manager (who is either foreign or Chinese), is also a very important and sensitive issue.
There are two main reasons to hire a manager in forex reserve management. First of all, there is a need to seek out maximum benefits that go above and beyond the normal standards. Secondly, there is a lack in specialized personnel who are utilizing the complicated investment tools. Currently, many countries in the world including Chile, Latvia, Mexico, Brazil, India, South Korea, Oman, Norway, Botswana and the Czech Republic, are hiring externally.
According to international practices, those managers who are hired externally should manage external funds according to domestic risk management principles and methods. Once the manager is commissioned to manage the fund, he has to submit a report on daily operations and at least one monthly progress report. Chile and Latvia have provided a basic standard for the evaluation of a domestic funds manager, while the guidelines for external funds management are the same as the domestic guidelines. In Mexico, managers hired externally act according to domestic guidelines designed by the board of directors. In Brazil, the management of external funds allows a small difference in the risk funds limit, but it belongs to fixed income investment without a currency market. Oman allows managers hired externally more time to manage the funds, while Chile only allows a small proportion of its foreign exchange reserve to be managed by these managers.
As a means for comparison, one can look at secondary standards and real standards. India gives a small proportion of investment to the externally hired managers, so that they can obtain relevant experience and knowledge from management of the fund. It can also be a way of training investment managers. South Korea gives externally hired managers a credit file with which to gain investment knowledge and increase returns. Norway allows these managers to handle the forex investment; however, the executive director must be informed of the manager's selection process and how to follow up on the manager's progress. Norway utilizes its central banking to choose an external forex investment manager and follow up on his management experience through the management of oil funds. In choosing this externally hired manager, the process employs the same standards as in managing oil funds. The manager is commissioned to manage 10% of long term benefit funds and 50% of shared investment funds. In Botswana, external forex investment managers can utilize 50% of funds.
New Zealand has not utilized an externally hired manager. The country does not consider hiring an external manager to be their only choice in the matter. Rather it can compromise by improving the bank's knowledge, market performance and maintaining market accessibility. The Reserve Bank of New Zealand expressed that if there were an opportunity in the market for specialized personnel or that an external manager could help increase risk adjustment returns, it would consider hiring an external forex investment manager as well.
China is not familiar with the international market setting and lacks experience in managing subsidiary products of funds. In future forex investment operations, it is important to have a grip on the risks on behalf of the country. While participating in international market investment, China has encountered failure in such investments as oil and copper fields. Since the state forex investment company will manage large amount of funds, managers should maintain a strategic vision, and be familiar with all kinds of financial tools, understand regulations within international investment market operations, and deal well with the changing international market. China still lacks this kind of professional management. It will take time to train these kinds of professionals. Therefore, hiring a manager with many positive achievements may be a good solution to this urgent need.
China can learn from Norway when hiring a manager for forex investment. When Norway wishes to hire an external manager, it posts an advertisement on the internet and lists various requirements for applicants. There are four stages in this employment process. First, applicants will have to fulfill ten requirements in order to become candidates. Second, there will be four groups of standards and an interview to select from the group of candidates. Third, a manager is chosen. Finally, a method is established to supervise and manage the selected manager.
Of course, this is just the first step in hiring a suitable manager. The major issue will be to determine how to manage and utilize this manager.
By People's Daily Online
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