Singapore's Temasek and the rise of sovereign investment funds:Welcome capital inflows or security threats?
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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Emerging economies in Asia like Thailand and South Korea are continually urged to liberalise financial markets and welcome capital inflows.
Emerging economies are naturally wary of these volatile capital inflows since they can just as quickly become tsunami-like capital outflows, pulling national prosperity and livelihoods out to sea (read global economy) with them as they did in 1997.
The big question nowadays is whether the same institutions and western nations urging financial market liberalisation would welcome as capital inflows the wealth of whole Asian nations, accumulated for maximum effect into massive sovereign wealth funds, quite a financial market innovation in itself, if you think about it.
The collective power of some of these funds, like the first Chinese fund valued at $200 million, promises to be awe-inspiring.
The precedent for these large capital flows is the Middle East petrodollar wealth that started flowing into international financial markets in the early 1970s, and has had a profound influence on decisionmaking, since then, especially in security and military matters, according to many.
Chinese capital inflows into strategic industries might: 1. facilitate Chinese government influence over western political decisionmaking, or 2. make inroads into western intellectual property and scientific knowledge, legitimate intellectual property asset-stripping, made legitimate since bought with hard cash.
These fears, may in the end lead western advocates of free market economics, to have some compunctions of their own about completely "free" capital markets and complete freedom to invest whereever and however one chooses.
Despite potential drawbacks, mutual gain and increased reciprocity might follow from these investments:
* A company's having a sizeable stake owned by the Chinese government might facilitate strategic investment in China by that company.* Long-term investors are usually stabilizing (as opposed to short-term speculators)
For further reading, read former US Treasury Secretary Larry Summers in the Financial Times in Funds that Shake Capitalist Logic raising the questions like: 1. How large will they become? 2. Where will they be invested?
"Inevitably, and appropriately, countries possessed of publicly held foreign assets far in excess of anything needed to respond to financial contingencies feel pressure to deploy them strategically or at least to earn higher returns than those available in US Treasury bills or their foreign equivalents...Does China really need a saving rate in excess of 50 per cent that all but forces hundreds of billions of dollars in reserve growth?...a crucial question for the global financial system and indeed for the global economy is how these funds will be invested."The question is profound and goes to the nature of global capitalism. A signal event of the past quarter-century has been the sharp decline in the extent of direct state ownership of business as the private sector has taken ownership of what were once government-owned companies. Yet governments are now accumulating various kinds of stakes in what were once purely private companies through their cross-border investment activities.
Read two more upbeat articles in The Economist on sovereign wealth funds. The first, a general overview, and the second arguing that they aren't as scary as many are making them out to be.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What recent action did Singapore's Temasek Holdings take that indicates that it is facing problems with its investment in Shin Corp?
2. Who owns Temasek Holdings?
3. What kind of company is Temasek Holdings?
4. In the wake of the Shin Corp purchase what negative things happened to Thaksin and Shin Corp?
5. How did the reduced value of its Shin Corp investment show up in Temasek's annual report recently?
6. What was the effect of the Shin Corp loss on Temasek's financial performance?
7. How long ago was Temasek established?
8. How does the size of China's proposed sovereign wealth fund compare to Temasek?
9. Which governments appear to be anxious about the emergence of these large sovereign wealth funds? Why?
10. How powerful did the Singapore government become in the Thai economy after the purchase? Why? (Use inference, Express your opinion)
11. When did Temasek's purchase of Shin Corp take place?
12. What was the reaction to the Shin Corp sale? Why?
13. How did the financial performance of Shin Corp fare after the sale? Why?
14. Was the takeover of Shin Corp "just business" now claims (but did not originally)? (Express your opinion)
15. Do you think the two students holding the sign in the protest photo (above right) have a valid point or not? (Express your opinion)
Bangkok Post Article August 4, 2007
OPINION / STATE-CONTROLLED INVESTMENT COMPANIESThe lesson of Temasek Holdings
DAVID WILSONThe write-down that Singapore's investment company took yesterday on its stake in Shin Corp highlights the risks facing China and Russia as they set up similar state-controlled funds.
Temasek Holdings Pte, part of the Singapore Ministry of Finance, headed an investor group that bought almost all of the Thai telecommunications company's stock from the family of then prime minister Thaksin Shinawatra and others last year.
The deal triggered a chain of events that led to the ouster of Mr Thaksin, the shutdown of Shin Corp's iTV television network - and a 35% drop in the Bangkok-based company's shares from the price that Temasek paid.
Temasek said in its annual financial report that it took an "impairment charge" to reduce the value of its investment. The unspecified loss contributed to a 29% drop in profit for the 12 months ended in March to S$9.1 billion (203 billion baht).
The investment fund, established in 1974, ended the year with the equivalent of US$108 billion (3,650 billion baht) in assets after exceeding $100 billion (3,380 billion baht) for the first time. As big as that number is, it may be eclipsed by China and Russia's proposals.
Chinese Finance Minister Jin Renqing said four months ago that the government would start a $200 billion fund (6,760 billion baht), modelled on Temasek. In May, Russian President Vladimir Putin called on the government to invest revenue from oil sales in stocks.
The moves to create so-called sovereign wealth funds have drawn the attention of regulators. US Securities and Exchange Commission chairman Christopher Cox said earlier this week that his agency is looking at how to address their increasing clout. France and Germany are considering new rules to govern them.
By taking over Shin Corp, Temasek gained control of iTV along with Advanced Info Service Pcl, Thailand's largest mobile phone company; C S Loxinfo Pcl, its second biggest provider of Internet service, and Shin Satellite Pcl, the country's only satellite operator.
The purchase of the Thaksin family's 49.6% stake, arranged in January 2006, drew criticism from the start because of Temasek's government ties and the family's tax-free sale of its holding. Protesters hit the streets to express outrage at the deal, worth $1.9 billion (77 billion baht at that time) and called for Mr Thaksin to step down. These objections didn't stop the Singapore fund from completing a tender offer at 49.25 baht a share, the same price that the family received, in March 2006. Government regulations mandated the bid, which raised its stake to 96%.
Shin Corp dropped below 30 baht within three months as business suffered from a boycott of company-related products, started by an anti-Thaksin group. Earnings fell 60% for all of 2006.
Mr Thaksin was ousted on Sept 19, 2006 in a bloodless military coup. In December, the government ordered iTV to pay about 98 billion baht in fines and 2.2 billion baht in back concession fees; iTV lost control of its network in February after failing to comply.
General Sonthi Boonyaratkalin, who led the coup, said in June that the takeover of Shin Corp was "just business".
The reaction, however, shows otherwise, and ought to raise concern for whoever gets to run China's and Russia's funds.
David Wilson is a Bloomberg News columnist. The opinions expressed are his own.
Vocabulary (in discussion above)
sovereign wealth funds - a state controlled investment fund making foreign investments, using foreign currency assets (like highly liquid US Treasury Bills) accumulated to keep exchange rates low and exports competitive (See Wikipedia on sovereign wealth funds)
liberalise - remove regulations and restrictions, allow free unregulated action
liberalise financial markets, financial market liberalisation - remove regulations on financial markets
wary of - does not completely trust
volatile - change suddenly and unexpectedly
awe-inspiring - impressively great or large
petrodollars - foreign exchange earned, accumulated, and invested by oil producing countries (See Wikipedia)
make inroads into - starting to deal with effectively, starting to master
compunctions - disapproval
asset-stripping - when a business is bought for its assets (which are "stripped" out) rather than developing it over the long-term into a thriving business serving all stakeholders including society and employees, not just shareholders
write-down - accounting adjustment due to asset's loss of value
a stake in - part ownership of (See glossary)
Shin Corp - (See Wikipedia on Shin Corp and Shin Corp Sale to Temasek and previous articles on this topic)
Temasek Holdings - (See Wikipedia on Temasek Holdings)
trigger - start, cause (See glossary)
a chain of events - a series of events, each event causing the next event
triggered a chain of events - start a series of events in motion, each event causing the next event
ouster - forced to leave a position of power
iTV television network - the only television station not owned by the government, started in 1995 when the company was granted a 30-year concession to operate a UHF television channel, lost money due to the high concession fees it had to pay to the government, bought by Thaksin and Shin Corp, journalists critical of Thaksin were fired but later won back pay in court, content mix shifted from mandated 50%-50% entertainment-news to more entertainment, an arbitration panel granted ITV a reduction in concession fees and allowed the increased entertainment, but a court over-ruled this and after a lengthy dispute over unpaid concession fees, iTV was taken over by the government's Public Relations Department in 2007 and its name was changed to Thai Independent Television (TITV) (See Wikipedia and previous article)
impairment - (accounting) when an asset loses value, its value in the companies accounting balance sheet must also be reduced (See Forbes Investopedia)
a charge - (accounting) a large cost affecting a companies balance sheet
a balance sheet - an official report that summarises the financial state and health of a company, "A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders. The balance sheet must follow the following formula: Assets = Liabilities + Shareholders' Equity." (See Forbes Investopedia)
goodwill - the amount paid for a company over book value, an intangible asset in its balance sheet (See Forbes Investopedia)
impairment charge - the new term for writing off worthless goodwill in a corporate balance sheet (Source: Forbes Investopedia)
specified - described with detail
unspecified - not described
unspecified loss - loss that was not described
eclipsed by - replaced by something else in importance
Chinese Finance Minister Jin Renqing - China's finance minister since 2003 (See Wikipedia)
x modelled on y - x is made to be like y
drawn the attention of - attracted attention, caused people to pay attention to
Securities and Exchange Commission (SEC) - the US government agency that regulates the trading of stocks and bonds to protect investors (See Wikipedia)
clout - influence and power
Advanced Info Service (AIS) - largest mobile phone company in Thailand (See Wikipedia)
Loxinfo - a large internet provider in Thailand and a subsidiary of Shin Satellite
Shin Satellite - Thailand's first satellite operator (See Wikipedia)
drew criticism - attracted criticism, caused criticism
tax-free sale of its holding -
outrage - shocked and very angry
* express outrage at
tender offer - invitation to existing shareholders to sell their stock shares at a set offer price
mandate - official authority
government regulations mandated the bid - government regulations authorised the bid
concession - special right or privilege to run a certain kind of business for a certain period of time, usually given by the government (See glossary)
back concession fees - concession fees not been paid yet
comply - follow a rule
failing to comply - did not follow a rule
just business - not politics
shows otherwise - shows that it is not true
Answer Key:
1. What recent action did Singapore's Temasek Holdings take that indicates that it is facing problems with its investment in Shin Corp?
Temasek Holdings took a writedown on its stake in Shin Corp which means it made an accounting adjustment due to asset's loss of value.
2. Who owns Temasek Holdings?
The government of Singapore, specifically the Ministry of Finance.
3. What kind of company is Temasek Holdings?
Temasek is a sovereign wealth fund. By pooling the Singapore's wealth into one fund, Singapore's investment money gains power in international financial markets. (power beyond what investors would have if they invested individually)
4. In the wake of the Shin Corp purchase what negative things happened to Thaksin and Shin Corp?
a. Street protests escalated after the purchase.
b. There was a coup.
c. Thaksin was ousted.
d. Shin Corp's television station iTV was shutdown.
e. There was a 35% drop in Shin Corp's share value.
5. How did the reduced value of its Shin Corp investment show up in Temasek's annual report recently?
The reduced value of Shin Corp showed up as a "impairment charge" reducing the value of the investment in Temasek's annual report.
6. What was the effect of the Shin Corp loss on Temasek's financial performance?
The Shin Corp loss contributed to a 29% drop in profit at Temasek. The article does not specify how much of this rather large drop was contributed by the declining value of Shin Corp.
7. How long ago was Temasek established?
About 33 years ago in 1974.
8. How does the size of China's proposed sovereign wealth fund compare to Temasek?
It is projected to be twice as large with approximately $200 million in capital compared to Temasek's $100 million.
9. Which governments appear to be anxious about the emergence of these large sovereign wealth funds? Why?
The US, France, and Germany all seem to be anxious. France and Germany might regulate them and the SEC in the US is looking into ways to deal with the large amount that they wield.
Their strength ("clout") as one of the largest institutional investors in the world is what seems to worry these western countries.
10. How powerful did the Singapore government become in the Thai economy after the purchase? Why? (Use inference, Express your opinion)
Very powerful. After the purchase, Temasek owned the largest mobile phone company in the country (AIS), the second largest internet provider (Loxinfo), Thailand's only independent TV station (iTV), and the country's only satellite operator (Shin Satellite).
11. When did Temasek's purchase of Shin Corp take place?
The deal was arranged and announced in January 2006 and despite protests was completed in March 2006.
12. What was the reaction to the Shin Corp sale? Why?
Outrage at the sale and street protests calling for Thaksin to step down.
The outrage was fueled by:
a. Temasek's ownership by the Singapore government
b. The tax-free nature of the sale.
13. How did the financial performance of Shin Corp fare after the sale? Why?
a. The stock price dropped from 49.25 (the tender offer) to 30 baht within 3 months.
b. Earning fell 60% for 2006.
The drop in stock price was partly due to a boycott of Shin Corp products and services.
14. Was the takeover of Shin Corp "just business" now claims (but did not originally)? (Express your opinion)
15. Do you think the two students holding the sign in the protest photo (above right) have a valid point or not? (Express your opinion)
