State-owned pain

State investment companies are all the rage these days; the logic being that bureaucrats can make better investment decisions than private actors. For a short-term litmus test of that idea look no further than Singapore and China, says the Wall Street Journal.

For instance:

  • Singapore's Temasek Holdings, an investment firm 100 per cent owned by the city-state's Ministry of Finance, reported recently a 29 per cent fall in group net profit for the fiscal year ending March.

  • The decline was attributed to "lower divestment gains" and an undisclosed "impairment charge" taken for Temasek's investment in Thailand's Shin Corp., a controversial deal that Bangkok's military government is investigating.

  • These results come in a bull market where many of the countries in which Temasek invests saw double-digit returns.

    China's new state-owned investment company isn't doing much better:

  • Before it was formally incorporated, the yet-to-be-named government investment company spent $3 billion to buy a small stake in Blackstone, a U.S. private equity firm.

  • The investment criteria weren't disclosed, nor was it clear who ultimately sanctioned the investment decision for the Chinese government.

  • Since Beijing bought Blackstone at $31 a share in May, the stock has sagged to $24.39.

    In both cases, the ultimate shareholders of these funds – Chinese and Singaporean taxpayers – have very little say over where, why and how their money is invested, says the Journal. It may be tempting for governments to manage money on behalf of their citizens, retaining control over pots of money. But these bureaucrats are a lot less savvy than private traders, who at least are subject to market discipline – and can be held accountable for it.

    Source: Editorial, State-Owned Pain, Wall Street Journal, August 6, 2007.

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    For more on International Issues:

    FMF Policy Bulletin/ 14 August 2007
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