China pushes ‘Asian investment corporation’ plan

03/05/2010 | Anthony Rowley

Asia needs to explore the idea of an “investment corporation” to help finance the continent’s development needs, especially for infrastructure, China’s vice finance minister Li Yong has suggested

Asia needs to explore the idea of an “investment corporation” to help finance the continent’s development needs, especially for infrastructure, China’s vice finance minister Li Yong suggested yesterday.

The idea resonated strongly with investment bankers and other private sector specialists at the ADB annual meeting.

Asia has huge needs for development capital, and also has very large savings – and more effective mechanisms are needed for bringing these together, Li told Emerging Markets. At a seminar earlier, he had proposed a new “Asian investment corporation”.

He declined to be drawn on whether China and other Asian economies might employ part of their massive foreign exchange reserves to finance the new mechanism, but pointed to Asian bond markets as a possible source of funding.

Li’s idea drew support from private sector infrastructure specialists, who suggested that neither existing public institutions nor commercial banks can meet infrastructure financing needs.

Li’s suggestion is “definitely in the right direction”, Harinder Kohli, former World Bank official and now CEO of the Washington-based Centennial Holdings research group, told Emerging Markets yesterday.

Too much of Asia’s massive savings leaves the region and then “round-trips” back again via foreign loans or investments. If a mechanism can be devised to keep some of this capital at home to help finance regional investment needs that would be welcome, Kohli said.

The fact that a senior Chinese official has broached the idea of a new Asian fund is seen as encouraging because of China’s huge savings. Veteran emerging markets investor Mark Mobius said the savers would be hungry for investment opportunities overseas once China’s capital controls are relaxed.

Arvind Mathur, chairman of Private Equity Pro Partners of Gurgaon, India, said that if China were to invest a small fraction of its $2 trillion of foreign exchange reserves in a new Asian fund, that would have a huge impact on infrastructure needs.

Chinese officials have voiced fears about having too much of the country’s reserves invested in dollar securities and are anxious to diversify into local currency-denominated infrastructure bonds, sources told Emerging Markets. Chinese private investors could also welcome non-dollar investments.

China could be reluctant to pursue regional initiatives while it is preoccupied with its domestic economic agenda, William Knight, an advisory director of New York-based Campbell Lutyens, a private equity group involved in emerging market infrastructure financing, cautioned.

Knight said that South Korea would be “perfectly placed” to take the initiative, given that it has the world’s largest state pension fund (NPS) and a very large sovereign wealth fund (KIC).

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