Goodbye, markets: Having monetized bonds, central banks have bought trillions in stocks


Central Banks Shift into Shares as Low Rates Hit Revenues

By Ralph Atkins
Financial Times, London
Sunday, June 15, 2014

Central banks around the world, including China's, have shifted decisively into investing in equities as low interest rates have hit their revenues, according to a global study of 400 public-sector institutions.

"A cluster of central banking investors has become major players on world equity markets," says a report to be published this week by the Official Monetary and Financial Institutions Forum (OMFIF), a central bank research and advisory group. The trend "could potentially contribute to overheated asset prices," it warns.

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Central banks are traditionally conservative and secretive managers of official reserves. Although scant details are available of their holdings, OMFIF's first "Global Public Investor" survey points out they have lost revenues in recent years as a result of low interest rates -- which they slashed in response to the global financial crisis.

The report, seen by the Financial Times, identifies $29.1 trillion in market investments, including gold, held by 400 public-sector institutions in 162 countries.
Central banks' actions aimed at stimulating economies, including quantitative easing, have deliberately sought to push investors into riskier assets, and share prices have risen sharply since 2009 -- leading to fears of stock market corrections if economic growth disappoints.

China's State Administration of Foreign Exchange (SAFE) has become "the world's largest public-sector holder of equities," according to officials quoted by OMFIF. SAFE, which manages $3.9 trillion, is part of the People's Bank of China. "In a new development, it appears that PBoC itself has been directly buying minority equity stakes in important European companies," OMFIF adds.

A chapter in the report on Chinese foreign investment trends argues SAFE's interest in Europe is "partly strategic" because it "counters the monopoly power of the dollar" and reflects Beijing's global financial ambitions.

In Europe, the Swiss and Danish central banks are among those investing in equities. The Swiss National Bank has an equity quota of about 15 percent. OMFIF quotes Thomas Jordan, SNB's chairman, as saying: "We are now invested in large, mid- and small-cap stocks in developed markets worldwide." The Danish central bank's equity portfolio was worth about $500 million at the end of last year.

Overall, the OMFIF report says "global public investors" have increased investments in publicly quoted equities "by at least $1 trillion in recent years" -- without saying from what level, or how the figure is split between central banks and other public sector investors such as sovereign wealth funds and pension funds.

Growth in countries' official reserves has increased fears about risks to global financial stability. In a contribution to the OMFIF report, Ted Truman, a senior fellow at the Peterson Institute for International Economics, writes: "Reforms are urgently needed to enhance the domestic and international transparency and accountability for this activity -- in the interests of a better-functioning world economy."

He adds: "Changes, real or rumored, in the asset or currency composition of foreign exchange reserves have the potential to destabilise exchange rate and financial markets."

Central banks around the world have foregone between $200 billion and $250 billion in interest income as a result of the fall in bond yields in recent years, OMFIF calculates, without giving details. "This has been partly offset by reduced payments of interest on the liabilities side of the balance sheets," it adds.

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