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Should we hire externally hired managers in forex reserve investment?
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19:54, June 28, 2007
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To solve the excessive foreign exchange (forex) reserve problem, China is
preparing to establish a state forex investment company. Besides creating
important systems and making policies, whether should one hire an
experienced manager (who is either foreign or Chinese), is also a very
important and sensitive issue.
There are two main reasons to hire a manager in forex reserve management.
First of all, there is a need to seek out maximum benefits that go above
and beyond the normal standards. Secondly, there is a lack in specialized
personnel who are utilizing the complicated investment tools. Currently,
many countries in the world including Chile, Latvia, Mexico, Brazil,
India, South Korea, Oman, Norway, Botswana and the Czech Republic, are
hiring externally.
According to international practices, those managers who are hired
externally should manage external funds according to domestic risk
management principles and methods. Once the manager is commissioned to
manage the fund, he has to submit a report on daily operations and at
least one monthly progress report. Chile and Latvia have provided a basic
standard for the evaluation of a domestic funds manager, while the
guidelines for external funds management are the same as the domestic
guidelines. In Mexico, managers hired externally act according to
domestic guidelines designed by the board of directors. In Brazil, the
management of external funds allows a small difference in the risk funds
limit, but it belongs to fixed income investment without a currency
market. Oman allows managers hired externally more time to manage the
funds, while Chile only allows a small proportion of its foreign exchange
reserve to be managed by these managers.
As a means for comparison, one can look at secondary standards and real
standards. India gives a small proportion of investment to the externally
hired managers, so that they can obtain relevant experience and knowledge
from management of the fund. It can also be a way of training investment
managers. South Korea gives externally hired managers a credit file with
which to gain investment knowledge and increase returns. Norway allows
these managers to handle the forex investment; however, the executive
director must be informed of the manager's selection process and how to
follow up on the manager's progress. Norway utilizes its central banking
to choose an external forex investment manager and follow up on his
management experience through the management of oil funds. In choosing
this externally hired manager, the process employs the same standards as
in managing oil funds. The manager is commissioned to manage 10% of long
term benefit funds and 50% of shared investment funds. In Botswana,
external forex investment managers can utilize 50% of funds.
New Zealand has not utilized an externally hired manager. The country
does not consider hiring an external manager to be their only choice in
the matter. Rather it can compromise by improving the bank's knowledge,
market performance and maintaining market accessibility. The Reserve Bank
of New Zealand expressed that if there were an opportunity in the market
for specialized personnel or that an external manager could help increase
risk adjustment returns, it would consider hiring an external forex
investment manager as well.
China is not familiar with the international market setting and lacks
experience in managing subsidiary products of funds. In future forex
investment operations, it is important to have a grip on the risks on
behalf of the country. While participating in international market
investment, China has encountered failure in such investments as oil and
copper fields. Since the state forex investment company will manage large
amount of funds, managers should maintain a strategic vision, and be
familiar with all kinds of financial tools, understand regulations within
international investment market operations, and deal well with the
changing international market. China still lacks this kind of
professional management. It will take time to train these kinds of
professionals. Therefore, hiring a manager with many positive
achievements may be a good solution to this urgent need.
China can learn from Norway when hiring a manager for forex investment.
When Norway wishes to hire an external manager, it posts an advertisement
on the internet and lists various requirements for applicants. There are
four stages in this employment process. First, applicants will have to
fulfill ten requirements in order to become candidates. Second, there
will be four groups of standards and an interview to select from the
group of candidates. Third, a manager is chosen. Finally, a method is
established to supervise and manage the selected manager.
Of course, this is just the first step in hiring a suitable manager. The
major issue will be to determine how to manage and utilize this manager.
By People's Daily Online
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