Reserves

Fundamental economic transition is underway in the world's second largest economy, China. Policy makers are both encouraging, and reacting to, a change in the mix of the country's economic growth, from the traditional export-led model (typical of what also occurred in the latter half of last century in the Asian tiger economies of East and South Asia) to a greater focus on domestic consumption, as citizens' disposable income increases. The transition is disruptive. The Chinese are facing issues such as controlling the transmission of credit through its so-called shadow banking system, and dealing with excess capacities created by inappropriate investment decisions by central planners. The inevitable result has been a slowing of overall economic growth, with a risk, at least in the minds of international investors, that such deceleration may become pronounced and persistent. Thus, one of the few engines of world growth would be removed. 

But Chinese leaders, and particularly its new premier Li Keqiang, an economist by training and a key player for years in economic policy formation in China, are well aware of these transition challenges. So, there is expertise, but also resources, to manage change. Given decades of rapid export growth and large trade surpluses, China's international reserves, now in excess of $3 1/4 trillion, are by far the largest in the world. Substantial reserves (typically held by a country's central monetary authority) allow a government to manipulate exchange rates—usually to stabilize rates and provide a more favorable economic environment or to purchase its domestic currency to protect the country from an attack by speculators. Reserves are also an important indicator of a country’s ability to repay foreign debt, and are a factor in determining a country’s credit rating.

And some countries are increasingly utilizing their reserves more aggressively - for investment abroad. China is doing this. Another is the tiny but wealthy city-sate of Singapore (whose international reserves of some $250 billion are easily the highest in the world on a per capita basis). These are managed in large part by Singapore's sovereign-wealth fund, GIC Pvt. Ltd. Its latest annual report indicates that it oversees more than $100 billion in assets, although most analysts believe this is significantly understated, and that the true figure is closer to $300 billion. Whatever it is, the fund, mandated to focus on long-term investment returns over 20 years, is re-balancing its portfolio, focusing on real estate and technology in America, and on equities more than bonds. Together with other world sovereign funds - especially those from Middle East countries with equally long-term perspectives - equity exchanges are now more affected by decisions made by public officials in countries with substantial reserves.