China fund gloomy on global outlook

China
A vendor sells kites on the bank of a river near the Boao Forum in China. Picture: AFP Source: The Australian
THE head of China's sovereign wealth fund, China Investment Corp, says he sees gathering clouds over the global economy, with the continuing debt crisis in Europe, no end in sight to the US property slump and natural disasters that have set back a nascent recovery in Japan.
Lou Jiwei's generally pessimistic outlook for the developed world summed up a broad theme of anxiety at two high-level meetings on the Chinese tropical island of Hainan over the past week: the Boao Forum for Asia, which brings together Asian business and political elites, and a summit of the Brics economies of Brazil, Russia, India, China and South Africa.
Both sessions gave vent to growing resentments among emerging economies -- the new engines of global growth -- that feel the rich world is imposing undue burdens on them, without giving them a sufficient voice in global financial decision-making.
Emerging economies are particularly concerned about the effects of the loose monetary policy in developed economies that is driving capital to their shores in search of higher returns, boosting inflation and creating volatility in commodities markets.
Policymakers in these economies are struggling to balance the need to propel domestic growth amid an uncertain international environment against the dangers of mounting inflation.
Addressing the Boao Forum last night, Mr Lou said that measures to combat inflation in emerging countries will likely lead to a slowdown in their growth. China's economic growth is widely expected to slow to about 9.5 per cent this year, below last year's 10.3 per cent expansion.
Mr Lou said emerging markets would carry the global economy along this year, but the momentum could slow in 2012. That could threaten growth in Europe in particular, he said, because it is increasingly reliant on exports to emerging markets even as it grapples with a sovereign debt crisis.
The difficulties would be exacerbated if the US started to withdraw its fiscal stimulus at the same time, Mr Lou said.
"From the investment perspective, (we're) not very optimistic about Europe," Mr Lou said. Still, he added that his $US300 billion-plus ($284bn) investment fund would continue to invest in Europe, citing infrastructure as one promising area. He described investment returns from the region as "not bad".
Despite recent optimistic data, the US has yet to solve the problems in its real-estate market, which hasn't yet bottomed out, Mr Lou said.
In Japan, there is a growing chance of a "major slowdown," he said.
"We are optimistic about the near-term global economic situation, but over the long term we are a little pessimistic," Mr Lou added.
CIC, established in 2007, has invested a chunk of China's enormous foreign-exchange reserves to try to achieve higher returns than the sovereign debt China had traditionally bought with its hard currency.
According to the latest financial reports available, CIC had total assets of $US332bn at the end of 2009, and Europe accounted for 20.5 per cent of CIC's diversified equity investments.
Other prominent attendees in Boao also sounded notes of caution. Dai Xianglong, head of China's pension fund, said the US government must reduce its trade and fiscal deficits to the average levels of developing nations and emerging markets in order to maintain the US dollar's stability.
The US Federal Reserve has pumped hundreds of billions of US dollars into the American economy, hoping to stimulate growth, but much of the liquidity has spilled into foreign markets as investors seek higher returns in faster-growing regions. The flood of money has also driven up prices of oil, copper, cotton, soybeans and other commodities, adding to inflationary pressures in China and other parts of Asia.
Last night, China raised the reserve requirement ratio for banks -- funds they must place with the central bank and not lend out -- by a half percentage point, the fourth such increase this year. The central bank has increase interest rates four times since last October.
China's statistics bureau said on Friday that the country's consumer-price index rose 5.4 per cent in March from a year earlier, accelerating from a 4.9 per cent rise in February and well above the government target of 4 per cent for 2011.
Meanwhile, divergent views on the potential role of the Chinese yuan as a reserve currency emerged at Boao.
Officials, bankers and academics on a panel about the future of the yuan, also called the renminbi, broadly agreed that the government's effort to make the currency more widely used overseas was wise and even necessary. But they also agreed that the internationalisation of the yuan carries risks as well as potential benefits, and should be carried out slowly.
Mr Dai, chairman of China's National Social Security Fund and former chief of its central bank, said on the panel that China will likely need at least 15 years to make the yuan a fully internationalised currency, with full convertibility and other attributes of current reserve currencies such as the US dollar.
"The yuan's internationalisation is a long-term process," he said. "My estimate is not conservative."
Officials including from France and the US have proposed that the yuan become a component of the special drawing rights, an artificial reserve currency created by the International Monetary Fund. The SDR is now made up of the dollar, the euro, the yen and the British pound. But officials have differed on what changes to China's exchange-rate system that would require.
China's government, while promoting the internationalisation of the yuan, has shied away from the idea because of concerns that it may involve bigger, faster changes than Beijing wants to make.
However, Chinese central bank governor Zhou Xiaochuan on Friday hinted at support for the idea. "If someone suggests that the RMB should be in the SDR, I welcome this kind of opinion," Mr Zhou told a panel discussion, using another common term for the yuan.
Former US Treasury Secretary Henry Paulson on Friday dismissed the idea that the yuan could become a reserve currency anytime soon, or even a component of the SDR. He said such moves would require significant further liberalisation of the yuan, which is now tightly controlled.
"To me a reserve currency has got to be one that is liquid and is convertible and whose value is determined by the markets, not by governments," Mr Paulson said.
Additional reporting: Rose Yu, Jason Dean and Owen Fletcher