Recent Academic Work on Temasek

A few days ago I received a copy of a paper appearing in the journal World Economics from Friedrich Wu a professor at the Nanyang Technological University in Singapore about his recent research on Temasek.  Now before I talk about the paper, I want to emphasize something.  I had never seen this paper before a couple of days ago, never corresponded with Dr. Wu before the other day, or provided any input on the paper.

To most in Singapore who know about Temasek, much of the material will be familiar with a significant portion of the material covered.  The strengths of this paper, and worth reading to even the knowledgeable Singaporean reader, are its analysis of the shift in investment strategy prior to the 2008 global financial crisis and the subsequent changes in their capital allocation.   The paper notes among other things that:

“The GFC highlighted Temasek’s overexposure to the financial services sector. This could have prompted it to decrease the share of its holdings in this industry from 40% in 2008 to 31% in 2013… Standard & Poor’s, however, insists that Temasek is still overexposed to financial services.”

The paper also notes the relatively higher level of political risk Temasek accepts.  Not only is Temasek filled with PAP party favorites and relatives, but its investments are increasingly tied to political questions.  The recent failure of the Indonesian bank take over which the Indonesian government tied to opening up the Singaporean banking market, something the Singaporean government refused, fail to assuage foreign governments that Temasek is a purely commercial government owned enterprise.  Though Temasek appears to have gotten a good deal in its purchase of Watson’s Drug from Hong Kong tycoon Li Ka-Shing, it won’t comfort Singaporean’s to others to note that Mr. Li said in a press conference that “the transaction wasn’t based solely on pricing…”.

Prof. Wu even mentions me fairly writing about my work that “As Temasek is not required to file its audited financial statements with the public registry, there are no concrete means of ascertaining the validity of either Temasek’s TSR claims or Balding’s argument.”  I think is an entirely fair statement to make because until Temasek actually reveals information about its financials and returns, we cannot make a definitive assessment of the truth of their claims.  I believe very strongly that the overwhelming evidence supports the idea that Temasek has not and continues to misrepresent its long term returns and financial health, but that we cannot know with absolute certainty at the moment.

I believe there are two fundamental problems, which to this date neither Temasek nor anyone defending them, have been able to address.  First, Temasek is claiming long term annual returns which are double what virtually every stock market in the world has earned.  Add that up since 1974, the year of Temasek’s inception, and the differences are just enormous.  Let’s begin by looking at Figure 1 which plots major stock markets and Singapore stock returns since 1974.

As you can see, most stock markets have returned pretty similar annualized rates of return which average out to 7-8% annually.  Hong Kong with its own rapid expansion and then the inflow from Chinese listings is the outlier, coming in at 9% annually since 1974.  Now let’s put it into perspective, just how large a difference Temsek is claiming below in Figure 2.

Temasek is claiming not that they did a little better than every major stock market, and the Singaporean index, since 1974 but that they simple obliterated it.  According to Temasek they beat indexes every year by a factor of about 2 to 1, which over 40 years adds up to Temasek beating global stock by a factor of nearly 20.   This is truly astounding performance and Temasek should just start giving investment lessons to Warren Buffet and every other investor in the world.

The second major problem is the large public surpluses and investment capital from CPF that has flowed through the Singaporean public purse.  Since 1974 Singapore in adding up operational government surpluses and investment capital from CPF, received more than $700 billion SGD in total yearly inflows.  Temasek and GIC claim they have earned 16% in SGD terms and 7% in USD terms over the long run.  Astoundingly, the Singapore balance sheet as of March 31, 2012 listed only $765 billion in assets.

The discrepancy between the financial assets Singapore has and should have based on the inflows it received, is enormous.  If GIC and Temasek are earning what they are claiming, even after subtracting out currency losses and interest on CPF capital to savers, Singapore should have approximately double the financial assets it lists on its balance sheet.  This is not unique financial theory but simply the laws of mathematics and the public data provided by the Singapore government.  Surpluses do not disappear and investment capital from CPF has to go somewhere.


I am sure that Temasek senior management thinks I am a quack.  However, this merely pushes me on because I know that they could prove me wrong and embarrass me easily by proving me wrong with minimal data releases.  They have chosen not to because, as I strongly suspect, they know that the evidence supports my version of events, even if imperfectly, much more than their version.  I have offered time and time again to publish a full retraction and apology to the Singaporean government, Temasek, and the Singaporean people if Temasek can provide data that proves I am wrong.  They have not.


You be the judge of what they believe that means.

Investment Bank Chatter on China

Goldman Sachs: We revise our Q1 sequential Chinese growth forecast down to 5%.


JP Morgan on Chinese banks: the speed up of financial and capital account reforms (e.g., widening the Rmb trading band) induces higher volatility on system liquidity… We believe banks may continue to find ways of regulatory arbitrage even if policymakers announce regulations on shadow banking products; nonetheless, the announcement of regulation may be negative for sentiment. Following the first default on corporate bonds in China during the NPC period, we expect policy makers to “allow” the first default of trust/WMP products in coming months. This could reduce fund flows from retail investors into such products and induce liquidity risks on shadow banking if the defaults are not

handled well.


JP Morgan on Chinese economic growth: We forecast the authorities will respond to slowing growth with a mini-stimulus in 2Q (frontloading in fiscal expenditure, especially regarding infrastructure projects and affordable housing)… Our base case is a mini-stimulus in late 2Q14. The earliest date could be following the release of 1Q14 GDP (mid-April). Based on 2012 and 2013 stimulus, we advise investors to prepare for trading opportunities in the J.P. Morgan China Growth Floor Winners Basket.  The risk to this strategy is the diminishing returns of the stimulus with building investor skepticism.


Bank of America on the falling RMB: We believe these moves were engineered and coordinated by the PBoC to solve the dilemma (rising rates, rising hot money inflow and rising CNY) it was facing in 2013… Chinese exporters will overall benefit from the band widening which sends strong signal of the end of one-way appreciation of CNY/USD. Note last year CNY appreciated around 6% against its basket, putting big pressure on Chinese exporters.


Credit Suisse on surging foreign borrowing by Chinese firms: In recent years, the foreign currency borrowing by Chinese entities has risen significantly, probably as a “carry trade” to take advantage of the higher interest rates in China amid appreciating RMB. We believe that the recent volatility of RMB is a policy measure introduced by the Chinese government to create uncertainties in exchange rate movements among market participants, in order to avoid the continued sharp growth of such “carry trade” activities. We do not think RMB movements are a deliberate measure to boost exports, given the export structure of China. To achieve the purpose of boosting exports, RMB would need to be devalued very significantly, which is not in the government’s interests.


There is one major point: there is increasing concern about the Chinese economy by the people who are normally the biggest cheerleaders of the Chinese economy.  QOQ growth to 5%, advice to expect a mini-stimulus, and Chinese companies engaging in a carry trade to make some money?  None of this is a sign of a healthy economy.


Here are my comments in the South China Morning Post about the protests in Taiwan about the trade deal focusing on services and investment.  These protests aren’t about the economics of a trade deal but about what Taiwanese see as a quiet annexation by Beijing.  If you want to ask how rational their fears are, maybe you should ask the average Hong Konger their thoughts on the matter.

The Thankless Job of a PR Frontman

As an academic who only has to deal with an institution that just wishes I kept my mouth shut more but doesn’t really press the issue (with some very real exceptions), I have the ability to speak the truth as I see it and not worry about public relations.  In a way I feel bad for public relation guys that have to spin indefensible positions at the behest of their masters.  Today we have two great examples.

Last week after hearing about the impressive run up of Olam prior to the Temasek buyout, I raised the possibility that the price gains prior to the buyout raised concerns.  Enter the Singapore Stock Exchange, who released a statement saying that there was no concern about information leaks because analysts had raised their price target for Olam.  This is a weak response at best because as the Wall Street Journal noted “Even after all those upgrades, the consensus target was only 1.68 Singapore dollars (US$1.33), according to FactSet, just a single Singapore cent higher than at the start of the year and far below the S$2 the stock hit just before the deal was announced.”  Just to be clear, the Singapore Stock Exchange is claiming that an increase in the consensus estimate to $1.68 explains the one month move from $1.43 to $2.  Interestingly, according to Thompson/FirstCall, only two brokers changed their hold recommendations to buy out of a total of 18 with buy/sell recommendations.  Let’s look a little closer at the how fast the price moved presented below in Figure 1 with all data normalized to 100 for ease of comparison and the data spreadsheet here.

After hitting its recent low on February 4, Olam began an unprecedented and rapid price increase.  During the same time that Noble Group and Wilmar were enjoying 12 and 14 percent increases, while Olam enjoyed a 40% rise.  Which if you believe the Singapore Stock Exchange, was due solely to analysts raising their consensus estimate to $1.68.  Not only is the rapid and large price movement suspicious, but so is the change in volume presented below in Table 1.

Wilmar and Noble both had month month changes in their average daily volume, but nothing that would raise alarms.  Olam volume, however, was quite steady until the month before the buyout.  During the month preceding the buyout, average daily volume more than tripled.  During the same period, when Noble and Wilmar received price upgrades, their volume increased but by significantly less.  It is a strains all credibility to the breaking point to claim that daily volume and price movements in Olam in the month prior to Temasek buyout are due solely to analyst upgrades which priced Olam at 25% less than the buyout price.  If the Singapore Stock Exchange wants to maintain any credibility it will look into settlement data about who was buying Olam in the month prior to the buyout.

The Wall Street Journal said it well writing “Nobody said explaining markets is easy, but this begs another look.” Indeed.

Last Friday CCTV News, the propaganda arm of the Chinese Communist Party, hosted Sheng Laiyun, a spokesman for the National Bureau of Statistics and Director of the Department of Comprehensive Statistics of the National Economy (another propaganda arm of the Communist Party), for a question and answer session.  One of the topics covered was the quality of data and statistics produced by the NBSC.  (The Q&A is on the CCTV Facebook website here on the evening of Friday March 14…let’s try to ignore the irony of a CCTV Facebook website for the moment).  The answers are classic examples of how to avoid saying anything.  The first question focusing on the quality of data issue was question 8 of all questions asked is truly Kafka-esque.

Q8: Critics have accused China of #inflating #growth #statistics in recent years. Has there ever been a domestic investigation of the matter? How do you ensure the accuracy of the data being collected? Has anyone at your bureau ever been punished for falsifying numbers?

A8: Many people are involved in validating the data. We live in an information age. We deal with data every day. Everybody wants accurate data. Not just Chinese but foreigners too asked this question. Spokesperson of some foreign statistic departments also asked me about this question.

Just to be clear, he answers the question about whether Chinese data is accurate by telling us only that he gets asked this question.  That is one of the best non-answers ever.  Later when asked why provincial GDP does not sum to national GDP he says:

The State calculates the national GDP. The province calculates the provincial GDP. But due to technical reasons, we fail to pick out the overlap part in the provincial GDP calculation. For example, the subsidiaries of a company are in Wuhan and Shanghai while the parent company is in Beijing. So when calculating the GDP, we calculate the GDP of the parent company to Beijing’s GDP. But we may also calculate the GDP of subsidiary company in Shanghai and Wuhan to the GDP of Shanghai and Wuhan. When calculating the national GDP, we need to pick out the GDP of Shanghai and Wuhan. So the national GDP is less than the total GDP of all provinces. This result is caused by technical reasons.

This is like saying China is calculating economic growth without subtracting imports.  This would be one of the most meaningless statistics ever and it seems a stretch at best to say that provinces only import 3% of their GDP from other Chinese provinces.  Finally, he tried to say that no less than the US Federal Reserve had agreed with Chinese economic data saying they “reflected the economic trend”.  This is a gross overstatement.  The study by economist says that China has grown but that data indicates significant manipulation and greater weakness in the overall economy that officially stated.  This correlates with my own work where the NBSC claims that housing price inflation has totaled 8% since 2000.  I’ll let you decide if the price of housing in China has increased 8% since 2000 and let his credibility stand against his own data.

Temasek and Chinese Banks

Just had to write about this interesting little tidbit I saw today about Temasek and Olam.  According to news reports, Temasek through a subsidiary is going to buy Olam at a 12% premium to the current share price.  This is an interesting development and to me raises a couple of questions.  First, I am intrigued that Temasek is paying a 12% premium after the stock has already increased 30% since the first of the year.  This means that Temasek is either paying nearly a 45% premium to what it could have paid just two months ago and is really slow to spot a value in its own portfolio or insiders were buying the stock in advance of a buy out offer they knew was coming.  This 30% increase is even more abnormal considering the Straits Times is essentially flat for the year.  Neither scenario is particularly attractive.

Second, this seems like a very oddly timed buy out.  Prior to the first of the year, Olam had traded primarily in the $1.50-1.75 SGD range and this follows on the announcement that profit declined 13%.  If Temasek felt this strongly about Olam and its long term business prospects, it would seem to be a better proposition to buy at the bottom of the market because you know the business well and believe the market is undervaluing the business.  Not wait until there is a 30% increase in two months and then offer a 12% premium.  The general philosophy of long term investors is buy low and sell high.  I am just a professor though, so what do I know.

Switching topics, for all the China bulls consider this, the market is valuing the big four banks at such an enormous discount because of the known unknowns of Chinese banks.  According to this Bloomberg article, $70 billion has vanished from the Big 4 Chinese banks market capitalization due to concerns over their asset quality.  Despite assurances about the health and capital adequacy, investors continue, rightfully I believe, to fear they are not being told the real state of Chinese banks.  Memo to Chinese state owned companies: you can lie to your own people, international investors aren’t quite so forgiving.


China News Update

According to JP Morgan, 23% of Chinese firms have a AAA rating and 77% have a AA.  Only 0.1% of firms have anything less than AA.  Why don’t I feel any better about Chinese debt markets?

How are Chinese markets not really markets?  The first corporate bond default actually tightened CDS spreads on corporate debt in China according to Credit Suisse.  If the intended message is to price risk appropriately, not sure if the so called “market” got the message.

I just can’t think the Chinese real estate developers selling 13% debt in Hong Kong is going to end well.  Maybe I am wrong but with the speed with which credit has expanded and the rush to foreign and shadow bank lenders is really starting to worry me.

Global copper prices drop 13% this year and 4% this past week.  This certainly isn’t due to a drop in US housing but must be related to Chinese demand.  Given copper’s use as collateral in lending and its consumption use in housing, this is something to watch closely.

Not sure I would agree that the weakening yuan explains everything that is going on in Chinese financial markets and economy, but I think it is important and does explain some things.  The weakening yuan leaves me with the sense that I am missing something important.  The PBOC are smart guys and they are doing this for a reason and I assume they know a lot more about what is going on than I do.  I still haven’t heard what I consider a good explanation why the PBOC decided to weaken the rmb.  All theories have real holes.

From my recent interview with Bloomberg on the Government Investment Corporation of Singapore or GIC:  “Being a long-term investor, GIC is not scared away by short-term volatility,” said Christopher Balding, an associate professor at Peking University HSBC School of Business in Shenzhen in southern China, who has researched sovereign wealth funds. “Brazil is definitely one of the economies with the best middle- or long-term outlook in Latin America.”  I generally think this is a good thing for GIC and Brazil.

Finally, in doing some research for a piece on the problems with Chinese economic data, I stumbled across this old news article for the Financial Times in 2005 which had this great passage:

“The bottom line is that China’s much-touted ‘overinvestment economy’ is probably a relic of the existing statistics,” said Jonathan Anderson, of UBS, in Hong Kong. Investment now accounts for nearly half of China’s annual GDP growth. The quality of China’s economic statistics have long been criticised, including by the country’s leaders, who worry that local officials exaggerate their own GDP growth in order to win plaudits in Beijing.

Jonathan Anderson, you were so young and naive back then.  Care to change your opinion?

My apologies for not updating as regularly recently, I have been travelling and working on a great new report on Chinese banks which I will post within a week or so.  Good stuff coming.