The first stage: directly managed by the central bank
Since the country's foreign exchange surplus and fiscal surplus are slightly surplus after meeting the necessary liquidity, the central bank is generally responsible for managing foreign exchange reserves and fiscal reserves. The central bank divides the reserve assets into different investment portfolios according to the policy objectives, the risk characteristics and duration of the reserve assets and the investment tools available in the market. This is the management mode implemented in Hong Kong. The Hong Kong Monetary Authority divides foreign exchange reserves into two categories: one is the asset reserves for liquidity, and the other is the surplus reserves for active asset management, which are invested and managed respectively.
The direct management mode of the central bank has obvious advantages: that is, the central bank can centrally manage all the surplus wealth of the country and avoid the costs that new institutions may pay due to lack of experience. Since there is no need to coordinate two independent institutions, the central bank can react quickly when the financial market fluctuates. Take the Asian financial crisis of 8 1998 as an example. At that time, the two-way operation of international speculators forced the Hong Kong Monetary Authority to take quick and effective measures to fight back. It is precisely because of the convenience of cooperation among institutions within the Monetary Authority that Hong Kong's economy can be restored to stability as soon as possible.
However, the direct management mode of the central bank also has defects: First, liquidity management and active asset management are very different in development strategies. When they belong to the same management organization, even though they can be separated in operation, different management strategies need to be submitted to the same management or board of directors for determination. If the thinking mode of management tends to the traditional central bank management mode, active asset management may be difficult to implement and may eventually move towards the traditional government-led reserve management. Secondly, the direct management mode of the central bank is easy to manipulate the foreign exchange market, which leads to the reputation risk of the central bank.
The second stage: the management of specialized investment institutions
Since1990s, foreign exchange surplus and fiscal surplus of various countries have been increasing. On the premise of satisfying the necessary liquidity and security of assets, sovereign wealth funds in various countries gradually use the remaining assets to set up special investment institutions, expand investment channels, extend investment period and improve the overall return on investment.
Singapore and South Korea are examples of this management model. 1981May, Singapore established Singapore Government Investment Co., Ltd. (GIC for short), with foreign exchange assets under management exceeding 1000 billion US dollars, equivalent to 90% of Singapore's official foreign exchange reserves. In the past 25 years, its average annual investment income has reached 9.4%. In July 2005, South Korea, which ranks fourth in the world in foreign exchange reserves, imitated Singapore and established Korea Investment Corporation (KIC) to manage the foreign exchange reserves of some countries according to its foreign exchange reserve appreciation plan.
Entrusting the country's surplus assets to an independent professional asset management institution can disperse assets, which is conducive to dispersing risks and improving its risk tolerance. Moreover, entrusting different asset management institutions to manage different asset reserves can expand investment channels and improve the flexibility of investment decision-making.
No matter which management mode is adopted, the basic development trend of sovereign wealth management is the same: sovereign wealth management is gradually changing from the traditional liquidity management mode aimed at avoiding risks to a more diversified asset management mode with stronger risk tolerance. This change enables sovereign wealth funds to actively expand the investment channels of reserve assets, build a more effective investment portfolio under the condition of effectively controlling risks, and then obtain higher investment returns. Moreover, this change in management mode also provides a brand-new and more effective policy tool for economic and monetary policy makers.