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Emerging Markets

Global Financial Power profiles: Capital investment

The rise of EM wealth

Liu Mingkang, Chairman, China Banking Regulatory Commission

China’s top bank regulator has spent years cleaning up the system and repairing the nation’s financial health. Today, his risk management philosophy is being put to the test

It’s hard to imagine Liu Mingkang ever having been under such intense scrutiny. The chairman of the China Banking Regulatory Commission (CBRC) used to help run the country’s central bank and chaired two of its biggest financial institutions. But the record pace of Chinese loan growth in the first half of 2009 has thrust him squarely into the spotlight.

China’s state-controlled banks completed a year’s worth of lending in the first three and a half months of the year, based on last year’s central bank-set loan quota, as the government leaned on the banking system to support its record Rmb4 trillion ($586 billion) stimulus package.

The explosion of new credit puts Liu and the CBRC under intense pressure to protect the sector from an almost inevitable rise in bad debt – at the same time avoiding measures that could threaten to derail China’s economic recovery.

The scale of the challenge is hardly lost on Liu, who took charge of the CBRC in March 2003. Indeed, the former banker has long been aware of the risks, and has spent the better part of a decade trying to put China’s banking sector right. It’s partly down to Liu’s efforts – cleaning up legacy bad debt, cracking down on corruption and vigorously pursuing a risk-based regulatory agenda – that China’s banks are today in a position to implement the stimulus.

“We’ve got to raise our vigilance against possible risks – credit risks, operational risks, market risks and strategic risks,” he told Emerging Markets in an interview in 2005. “This is a long and historic mission, and we know how.”

Liu has always taken a broad view of his responsibility, sketching what he sees as the distinctive aspects of China’s regulatory philosophy. “Profitability today can never mean anything in the long run,” he said. “You’ve got to know where you are and where you’re heading. In China, harmony in development of the whole society is important.”

He has set about more recently trying to hammer home the importance of solid risk management. “This year, with the rapid expansion in credit, the range of risks in the banking sector is on the rise,” Liu said last month. “Financial institutions should always stick to the bottom line of compliance management, in order to lay a solid foundation for risk management,” he continued, calling for banks to strengthen their internal compliance measures with “professional, scientific approaches”.

That warning was only the latest in a series of measures designed to keep China’s banking system in check. Liu and the CBRC have clamped down on lending to speculative investment, and more recent measures announced in August will limit the amount of regulatory capital that a bank can carry in the form of subordinated bonds.

Measures such as these paint Liu as an increasingly sophisticated regulator, and he has won praise from international observers for his focus on risk. “The record bank lending is not sustainable, and the authorities were correct to slow down the pace and sound some notes of concern,” says Stephen Roach, Morgan Stanley’s Asia chairman.

The inherent conflict of interests in China’s centrally-controlled financial system, where the government is the biggest shareholder and sole policy-maker, present an obvious challenge for its top regulator. But it’s a task that Liu – elevated this year to the Communist party’s central committee – is perhaps best placed to tackle. — Steve Garton

Yi Gang, Administrator, State Administration of Foreign Exchange, People’s Republic of China

Yi has his work cut out for him: Safe, which oversees China’s $2.1 trillion foreign exchange reserves, is one of the most crucial – and closely watched – cogs in the world’s financial machinery

China’s foreign reserves keep on climbing. In the first six months of this year, they increased by another $185 billion to reach $2.13 trillion – the world’s largest stockpile of foreign exchange, and an unprecedented war chest for what is still basically a poor country.

The one-way accumulation of reserves, combined with the non-convertibility of its own currency, means that China’s State Administration of Foreign Exchange (Safe) has become one of the most important levers in the global financial architecture; the other – in the new G–20 world order –is the indebted US Treasury.

Safe appointed a new chief in July – Yi Gang, a former deputy governor of the People’s Bank of China, which oversees Safe’s activities. Yi’s job carries enormous responsibilities and makes him a serious player in global capital markets, especially in US Treasuries, but also increasingly in the equity markets.

Some 15% of China’s reserves have gone into equities since Safe started diversifying into stock markets early in 2007 – partly in an attempt to compete with the newly founded China Investment Corp (CIC), which is under the finance ministry. The portfolio has shed half its value in that time.

Safe is also the domestic regulator of foreign exchange transactions, making it the key arbiter of China’s attempts to control money coming in and out of the country while also attempting to make its currency available for international trade settlement, with the long-term goal – though many analysts believe it will be very long term – of making the renminbi convertible.

Historically, Safe’s performance has been steady. But it has lost money recently, most notably in the collapse of Washington Mutual. Earlier this year, it agreed to invest up to $2.5 billion in TPG’s $7 billion rescue of the troubled US lender. It was the largest commitment ever made to a private equity firm by a sovereign wealth fund.

Yi is also at the centre of the political question of why China continues to keep a vast stockpile of foreign reserves rather than spending money on raising living standards across the country.

But as People’s Bank of China governor Zhou Xiaochuan admitted in an interview with Emerging Markets last year, the rate of growth in China’s foreign exchange reserves is unsustainable, but the country cannot significantly change its policy because of uncertainties in the global economy. “I should say that [the current rate of foreign exchange accumulation] is not desirable because the government already admits that they want to have better balance of payments,” Zhou said.

Be he also reiterated China’s avowed position since it first embarked on reforming its currency regime, namely that China would continue to increase exchange rate flexibility, in line with its long-stated principles. “Going back to 2005, at the time we mentioned three principles for reform of the exchange rate,” Zhou said. “One is that there is independent decision-making, the other is gradualism and the third is keeping it in a controlled range – not to allow it to get out of control.”

Another pressing concern for Yi and Zhou is the fate of the US dollar, which has weakened to multi-month lows against a broad range of currencies, including the euro and the yen.

Policy-makers in China are concerned about the widening fiscal deficits in the US as well as the aggressive monetary stimulus by the Federal Reserve, which could generate inflation and downward pressure on the greenback. That in turn would put the value of China’s massive dollar-denominated asset holdings, including more than $800 billion in Treasuries, at risk of depreciation.

Earlier this year economist Brad Setser, now at the US National Economic Council, pointed out another downside to China’s foreign exchange reserve accumulation: “The difficulty for China is that it has never explained to its own population that buying dollars to keep your exchange rate down means that you are going to lose money.

“China ought to be less worried about inflation in the US devaluing the dollar and more concerned about currency losses if the US becomes a less friendly export market.” —Nick Parsons

Zhou Xiaochuan, Governor, People’s Bank of China

The People’s Bank governor is chief banker to the US government and monetary policy-maker for a nation of 1.3 billion people

Few people on the planet have a job as enviable yet as daunting as Zhou Xiaochuan. The 61-year-old governor of the People’s Bank of China, the country’s central bank, holds a position of genuine global heft – potentially as influential as chairman of the US Federal Reserve or president of the European Central Bank.

Zhou has overseen the country’s foreign reserves since 2002, which now stand at roughly $2.1 trillion. That bald number alone makes the People’s Bank the largest single public financial institution in history.

Over the past 30 years China has made enormous strides, nowhere more than in its ability to manage its own finances and – more importantly – enmesh the financial and economic fortunes of a rising superpower with the rest of a troubled world.

Just a few decades back, China seemingly had no need for a central bank governor. Chairman Mao scrapped the position when he imposed the decade-long Cultural Revolution on the country in 1966. The position remained unfilled for more than seven years.

These days, China’s central bank governor is as central to the global flow of capital as the US dollar, the Dow Jones Industrial Average, or the over-the-counter derivatives market. In 2005, Zhou joined the influential Washington-based body, the Group of 30, chaired by the former US Fed chairman Paul Volcker. The group studies the economic consequences of decisions affecting exchange rates, the international capital markets, and a vast array of macroeconomic and financial issues.

Zhou spends every day not just thinking about these issues, but acting on his decisions. As the global economic crisis spread in 2008, nearly destroying the fabric of the world’s financial system, Zhou was quick to berate, cajole, direct, and most importantly act.

In early 2009 he called for a basket of currencies to replace the US dollar as the world’s reserve currency, shaking world markets. Rattled by the underlying weakness of the dollar in recent years, China is vying to reduce its dependence on the US currency.

The country also moved secretly to increase its gold reserves, largely by ramping up domestic production of the metal. China’s gold reserves have reportedly more than doubled since the start of 2006 to more than 1,000 tonnes.

Meanwhile, the country has shown ever-greater desire to interact with global markets, with Zhou often spearheading the process. During 2009 China rolled out the first-ever sale of yuan-denominated government bonds outside the mainland. In July, Beijing sold Rmb6 billion ($880 million) in bonds in Hong Kong, largely, Chinese officials said, to improve the status of China’s currency.

China’s willingness to test out new economic models doesn’t mean the central bank is ready to flex its muscles fully on the global stage. Despite the presence of its vast wealth, Beijing’s financial power remains to a great extent that of a paper tiger. China’s financial system lacks heft and finesse; its consumers are fearful of spending; local corporates remain overly dependent on the sloughing export market.

Thus Zhou has consistently made it clear – in the face of determined and continued criticism from Washington, particularly under the Bush administration – that China will not let the yuan float any time soon; rather, China remains committed to a gradual shift in the exchange rate.

His subordinates confirm his position. This September, Guo Qingping assistant governor at the People’s Bank, said the yuan had a long way to go before it could be considered a global currency, noting that the country was cautious about the concept of an international yuan.

No one could accuse Guo’s boss of lacking the nous, the stamina or the dark arts involved in managing a country’s finances. As the controller of the world’s largest-ever national kitty, Zhou’s impact is hard to overstate. “When we observe that China can absorb the impact of exchange rate flexibility, then we will enlarge it,” he told Emerging Markets last year. —Elliot Wilson

Ho Ching, Chief Executive, Temasek

Singapore’s state-owned investment giant represents Asian capital’s westward migration like few others

Temasek, founded in 1974 with the Singapore government seeding of 35 company holdings from a detergent maker to a bird park has come a long way in a generation. It is now worth some S$172 billion ($122 billion) and claims a compound annual shareholder return of 16% since inception.

Key agent of change for the development of Temasek, the investment arm of the Singapore government, in recent years has been the appointment of Ho Ching as chief executive in 2002. Ho is also the wife of Singapore’s prime minister, Lee Hsien Loong.

Ho has converted Temasek from a Singapore-centric holding company into a leading investor in Asia. “Temasek in the past five years has moved from being a passive custodian to being an active – and outstanding – investor,” says Jim Rogers, the internationally acclaimed investment analyst.

So, although Temasek remains a major shareholder in famous Singaporean companies – notably Singapore Airlines, DBS and CapitaLand – its investment strategy is based on profit not geography. “We don’t see our role as shoring up anybody,” Ho says. “We see our role as getting a return, and if there are opportunities for return, we will be there.”

Temasek’s prolific buying of banks has made Ho one of the key players in global banking. Temasek is one of the largest shareholders in Standard Chartered, DBS, India’s ICICI Bank, banks in Indonesia, South Korea and Pakistan, and in China two of the biggest banks in the world, China Construction Bank and Bank of China.

But it hasn’t always gone well. Last year Temasek mistimed investments in Barclays and Merrill Lynch and was forced to sell the stakes at the bottom of the market. Nevertheless, the global market rally has ensured that the fund’s portfolio stands just 7% below its peak of $185 billion in March last year.

Temasek has hit the headlines in the past couple of years with the acrimonious purchase of a stake in Thailand’s Shin Corp – which arguably led to the overthrow of Thaksin Sinawatra, the prime minister, in 2006 – and in Indonesia, where it holds large (and resented) stakes in the country’s banking and telecoms sectors. Also Ho was to have stepped down this year to be replaced by former BHP Billiton chief executive Chip Goodyear but his recruitment failed in July.

Ho can still point to market-beating returns over almost any time frame – and it is instructive that the worst investments during her tenure have been in the developed world. “We felt there could be a downturn,” says Ho. “But we were looking at the triggers in the wrong places... we made the assumption that the developed economies, particularly the large economies, are well managed and regulatory risks are low,” she says. “Today, we pay a lot of attention to what is being said and done in the US.”

One characteristic of Temasek, under Ho, has been its transparency. It doesn’t disclose everything, but its detailed annual reviews frequently top 100 pages. They are an open book compared to sovereign funds in the Middle East.

Controversially, Ho last year introduced a compensation system tied to performance, which resulted in slashed pay and bonuses for senior executives.

She answers to a board containing only one member in a direct government position, with a varied roster of other members that balances locals with executive director Simon Israel, formerly at Danone Group, and Marcus Wallenberg of the Scandinavian SEB Group.

For the future, Temasek is going to cut the developed OECD to just 20% of its portfolio and stick to what it knows: 70% in Asia including Singapore, and a further 10% in other emerging markets. —Chris Wright and Nick Parsons

Lou Jiwei, Chairman, China Investment Corporation

China’s desire to make a return on its hard currency reserves gave birth to CIC. Its boss shows little sign of retreating into the shadows

China Investment Corporation (CIC), China’s $298 billion sovereign wealth fund, is back on a buying spree. Having spent 2008 licking its wounds after its investments in Morgan Stanley and Blackstone tanked, CIC is buying everything from real estate to green energy projects, as well as pumping money into outside asset managers.

The man behind its latest bout of acquisitiveness is Lou Jiwei, a former Chinese vice minister of finance who took over as chairman of the newly founded CIC in 2007.

Lou was widely known as one of the country’s most seasoned financial operators. He was handpicked by the top leadership to run the new agency, which was set up as an alternative direct investment counterpart to Safe (the State Administration of Foreign Exchange).

Lou’s brief was simple: like Safe, to mitigate risks to China’s immense foreign exchange reserves; and crucially, to secure better returns than parking China’s hard currency in US Treasuries.

“The fund’s investment philosophy is stunningly different to the usual Chinese firm’s reluctance to expand overseas,” say Daniel Rosen and Thilo Hanemann of the Peterson Institute for International Economics. “Foreign markets intimidate their bosses, who lack the know-how to manage them or keep costs down. CIC derives greater confidence from better management, although only two CIC board members have significant experience outside of China.”

That said, CIC has signally failed to achieve its investment goals so far. Last year CIC posted a negative 2.1% return on its global investment portfolio as the value of stakes such as those in Wall Street bank Morgan Stanley and private equity firm Blackstone Group slumped.

Now it is looking to pick up distressed assets in the US through the government-sponsored stimulus programme, the Public-Private Investment Programme (PPIP). But although US financial institutions have proven disastrous, Chinese investments have proved more positive.

CIC’s balance sheet has been saved by its purchase of Central Huijin, a state-owned investment company that invests in state-owned financial institutions in China; in the last year it has bought stakes in Agricultural Bank of China, China Development Bank and Citic Capital.

Lou said recently that things are looking up. “It will not be too bad this year. Both China and America are addressing bubbles by creating more bubbles, and we’re just taking advantage of that. So we can’t lose.” Having a range of outside managers working with diverse asset classes and locations should produce less volatile returns than managing them in-house. He hopes to invest $6 billion in hedge funds by the year’s end.

Ironically the hostility among western nations to its acquisitions has played in CIC’s favour. It was fortunate in having to abandon its bid for AIG for this reason. This August, Lou admitted CIC had been “saved” from further investments by protectionism in US and Europe.

Over the past few months CIC has bought stakes in the Noble Group (the commodities supplier), Goodman Group (Australia’s largest property trust) and Teck (a Canadian mining firm), as well as sinking more money into Blackstone and Morgan Stanley’s real-estate arm. Meanwhile, Goodman and Teck hope their relationship with CIC will allow them to make a splash in the Chinese market.

Lou is worried his fund might miss out on a global asset recovery, especially in companies listed on China’s exchanges. But Michael Pettis, a professor at Peking University, says he is sceptical about the speculation over unremitting growth of the CIC and its counterpart Safe.

He says both institutions will only accumulate dollars as rapidly as the US current account deficit allows. If the US closes its trade gap in the next few years – as many expect – net foreign accumulation of dollars will slow sharply, and with it China’s build up of reserves.

For the time being, however, CIC remains the world’s fastest growing sovereign fund. —Nick Parsons

Sheikh Ahmed bin Zayed Al Nahyan, Managing Director, ADIA

When the credit crunch came, ADIA stepped out of the shadows. The world’s largest sovereign fund is increasingly looking towards domestic investment

When oil was discovered in Abu Dhabi in 1958, the emirate had a population of 46,000, four doctors and five schools. Most of the population lived in mud huts. Today, the emirate has its own Guggenheim museum, its own Louvre, its own Sorbonne, and the average net worth of its citizens is around $16 million [TK really?]. Its city skyline is dotted with skyscrapers, and perhaps the most impressive of all is the gleaming 38-storey headquarters of the Abu Dhabi Investment Authority (ADIA).

Founded in 1976, the fund is managed by Sheikh Ahmed bin Zayed Al Nahyan, a 39-year-old western-educated businessman, and the 12th son of the late president of the UAE, Sheikh Zayed.

Today, ADIA is thought to be the largest SWF (sovereign wealth fund) in the world, and the second biggest investor in the world after the Bank of Japan. Estimates of its wealth vary from $800 billion at the top end, to the Council for Foreign Relations’ more conservative estimate of $365 billion.

From its early days ADIA has been known for its sophistication among its state-backed peers, investing in a broader mix of assets, including equities, fixed income, private equity and commodities. Eighty percent of the fund’s assets are managed by external portfolio management companies, but the strategy is determined in-house by a team headed by Jean-Paul Villain.

Sheikh Ahmed has preferred to keep the fund out of the headlines, but the credit crunch brought it on to front pages of newspapers around the world when it invested $7.5 billion into Citigroup in November 2007, becoming the largest single investor in the US bank as it struggled to recapitalize.

The deal, among other investments by SWFs into beleaguered Wall Street firms, highlighted the shift in financial power eastwards that the credit crunch re-inforced.

Since the credit crunch, ADIA has begun to move out of the shadows, hiring two former Morgan Stanley press officers, and also signing up to the IMF-brokered Santiago principles, which commit SWFs to follow transparent commercial business practices.

SWFs had been heavily criticized, in particular by politicians in the US, Germany and France, for using their funds as instruments of state policy rather than maximizing shareholder value. But Hamad al Suwaidi, a director of ADIA, told Emerging Markets last year that hostility “was greatly reduced when we started the [Santiago principles] process, and the more information we offered the less hostility there was”.

Over the past year, calls have grown for government-backed funds to invest in domestic markets. John Nugee, head of official institutions at State Street, says: “ADIA has had to change and evolve during the crunch, not least by becoming a more public institution. It now has to decide how much and where it wants to invest domestically, having mainly invested abroad in the past.”

The homeward shift has already begun. As part of a drive to focus investments domestically, ADIA’s investment arm Abu Dhabi Investment Company rebranded in June. Now known as Invest AD, the firm hopes to attract institutional investors to regional investment opportunities. —Julian Evans

Prince Alwaleed bin Talal, Chairman, Kingdom Holding Company

Defying stereotypes, Prince Alwaleed has risen to become one of the world’s shrewdest investors – blazing the trail for a new generation of Arab wealth buying western assets

Back in the early 1990s, Arab investors were no strangers to western markets, but they tended to keep a low profile. Sovereign wealth funds occasionally made a blip on the radar, and many private equity deals could be traced back to the Gulf, but individual investors rarely made the headlines.

That all changed in 1990, when Prince Alwaleed bin Talal made his international debut with the dramatic rescue of Citicorp. Scion of the Saudi ruling family and grandson of Lebanon’s first prime minister, the prince displayed a knack for self-publicity and, more importantly, a keen eye for undervalued companies. He would go on to build a reputation as the “Arabian Warren Buffet”, in the words of Time magazine, building a fortune worth some $21 billion by 2007.

Alwaleed defied western stereotypes about Arab princes. At a time when most Gulf billionaires were sitting on inherited fortunes and dabbling in local real estate, Alwaleed put his capital to work abroad. After returning to the Gulf in the 1980s from university in the US, he turned an inheritance of less than $1 million into a billion-dollar fortune.

It was during this period that the prince, now 54, showed a knack for spotting undervalued companies, including Apple, News Corporation and Time Warner.

This was enough to gain Alwaleed international recognition, with Forbes describing him as one of the world’s shrewdest investors. It also made him the poster-child for a new generation of entrepreneurs in the Gulf.

“The 1980s Arab is dead. The nouveau riche Arab is dead,” Sheikh Maktoum Hasher al-Maktoum, a member of the royal family of the United Arab Emirates, said in 2004. “All we hear about is Bin Laden, Arafat, terrorists. The Arab world needs its Bill Gates. Prince Alwaleed bin Talal is the only one of us recognized for business. He is the only one who has been exposed to the media.”

Alwaleed was thrust into the limelight following his rescue of Citicorp. It was a masterpiece of timing. At the end of 1990 he bought 4.9% of the ailing bank’s existing common shares for $207 million, going on to spend another $590 million on new preferred shares the following February. This took his stake to 14.9%.

Two weeks later, Citicorp’s capital crisis passed when a group of international investors bought a further $600 million of new preferred shares. By 1994 the bank’s share price had soared and Alwaleed’s fortune – and reputation – were secured.

The prince’s heavy exposure to international markets, however, has in the past year proved a liability. His flagship Kingdom Holding Company posted a loss of $8.26 billion in the fourth quarter of 2008 due to the drop in the value of its global investments, which include its 3.4% stake in what is now Citigroup.

But with global markets – and Citigroup’s share price – on the rebound, Alwaleed’s fortunes may again have turned. Yet even Kingdom’s recent divestments have made good returns, from a 5% stake in the local Samba Financial Group to a 39% interest in the Four Seasons Resort in Egypt’s Sharm el-Sheikh, which it sold for $70 million. If the crisis has shown anything, it is that Alwaleed has an eye for a good sell as well as a good buy.

And as of March, the prince still ranked as the 22nd wealthiest person in the world, according to Forbes magazine, with an estimated net worth of more than $13.3 billion. —Digby Lidstone

Omar Bin Sulaiman, Governor, Dubai International Financial Centre

DIFC’s extablishment cemented Dubai’s meteoric rise as the world financial hub. It has also rewritten the rules on Arab business

It’s odd to think that the Dubai International Financial Centre (DIFC) only opened five years ago. The establishment of Dubai as one of the main financial and business centres in the world has been so fast, and effective, that it seems like it has always enjoyed a place beside London, Hong Kong and New York.

The man who has played the longest and most critical role in the centre’s establishment is Omar Bin Sulaiman, DIFC’s governor. “The global financial services landscape is, from this moment, forever changed,” he said when the DIFC was launched in 2002. “We can now say that the gap left by the capital markets of Europe and the US in the west and Asia in the east is a step closer to being filled.”

Indeed, the DIFC, with Bin Sulaiman at the helm, has to some extent rewritten the book on Arab business. Before it was established, business climates across the Arab world were often closed, inward-looking, opaque and inhospitable to foreign investors.

But the DIFC took a radically different approach. Dubai’s government realized early on that a lack of natural resource wealth placed a premium on becoming a commercial hub. So the leadership re-invented the emirate as a financial centre, and in doing so, tried to make the DIFC as foreign investor-friendly as possible.

The DIFC has its own legal system, with laws that are closely based on English common law. It has its own courts, headed by Sir Anthony Evans, formerly a senior commercial judge in the UK.

It has also attracted thousands of expat bankers, lawyers, and other highly skilled workers with its offer of zero tax on income and profits. It also has no restrictions on foreign exchange or capital repatriation, and allows 100% foreign ownership of companies and land.

Since the project was launched, it has quickly attracted a critical mass of top financial names: Julius Baer and Standard Chartered were the first banks to be granted operation licences, followed by such blue chip firms as Deutsche Bank, Goldman Sachs and Morgan Stanley.

Another important landmark was the launch in 2004 of DIFX, Dubai’s international stock exchange, which became Nasdaq Dubai in 2007, when Bourse Dubai took a stake in Nasdaq in return for Nasdaq buying a stake and giving its brand to DIFX. Nasdaq Dubai has since expanded, buying control of OMX last year. It also has a stake in the London Stock Exchange.

That said, the past two years have been difficult for Dubai, with the credit crunch putting strain on over-leveraged state-owned firms such as Bourse Dubai and Dubai World. Other regional financial centres such as Doha, Abu Dhabi, Beirut and Bahrain have had easier times of it, and have attracted greater interest from international firms.

However, bankers say they expect Dubai to remain the key hub in the region. “Dubai’s had a bumpy time of it, but we think it will remain most western firms’ choice as their main MENA [Middle East and North Africa] base,” says Karen Fawcett, global head of transaction banking at Standard Chartered. — Julian Evans

Arminio Fraga Neto, Chairman, BM&F Bovespa

The former central banker is leading the charge to boost Brazil’s standing in global markets

Former Soros fund manager and central bank governor, Arminio Fraga Neto, is a key figure in moves to integrate Brazil’s domestic capital markets into global markets.

Last year he became chairman of BM&F Bovespa, the Sao Paulo stock exchange and futures market, and has helped broker a partnership with the Chicago-based CME Group. He is also negotiating a strategic, commercial and technological partnership in equities with Nasdaq OMX Group.

As one of the vice chairmen of the Group of 30, he is one of the authors of advisory reports on the post-crisis financial reforms, which highlight a series of recommendations to improve the system.

“He is certainly one of the most influential figures from Brazil on the international stage these days. Naturally, this has helped boost the profile of the stock exchange here,” says Paulo Oliveira, director of business development at BM&F Bovespa.

Although discreet by nature, Fraga can be outspoken – particularly over his desire to promote culture change in the local financial markets, which are too dependent on subsidized loans from BNDES, the Brazilian development bank.

“BNDES will have to stop breastfeeding the market at some point,” he said during a recent debate at the Rio de Janeiro-based security exchange commission (CVM).

“He has got a huge challenge ahead of him. The conditions to deepen this market right now are not ideal,” says William Eid, a Sao Paulo finance academic. “Last year, only 2% of funds used by listed companies came from the stock exchange. The rest came from banks, debentures and their own funds. The market is still very narrow. And the recent experience with IPOs (initial public offerings) has not been that successful.

“More than a 100 companies have been listed in recent years, but the performance has not lived up to expectations. I think he accepted this as yet another challenge,” Eid says.

Fraga leads a challenging double life – besides being chair of BM&F Bovespa in Sao Paulo, he also manages his hedge fund, Gavea Investimentos, which he set up in 2003, in Rio. Nevertheless, his toughest challenge dates back to early 1999, when he took over the presidency of the central bank in the midst of a messy currency devaluation.

As an acknowledgement of his achievements as president of the central bank, Fraga has been called the ‘Alan Greenspan of Latin America’ for his skilful handling of Brazilian monetary policy. “He led an amazing revolution as he managed the crucial transition towards the implementation of the inflation targeting regime in Brazil,” says John Welch, chief economist at Itau Unibanco in New York.

“There are a number of things in those markets that still need improvements. The next step in the modernization of the Brazilian capital markets is pretty much guaranteed,” he says.

Certainly his academic background – he received a PhD in economics from Princeton University – has proved a useful adjunct to his commercial experience. Before becoming central bank governor in March 1999, Fraga held many high-level positions in international economics including being the managing director of Soros Fund Management in New York and vice-president of Salomon Brothers also in New York. —Thierry Ogier

Guillermo Ortiz, Governor, Bank of Mexico

Mexico’s central bank governor spent a decade banishing the demon of hyperinflation. The payoff: one of the deepest and most liquid local debt markets of any emerging market – and the birth of a burgeoning global asset class

As the global financial crisis gathered pace last summer, Mexican president Felipe Calderon issued a rare public challenge to the country’s central bank, indirectly urging it not to raise interest rates. But central bank governor Guillermo Ortiz was concerned about inflation. The three monthly rate hikes that followed despite Calderon’s comments, were proof of how the role of the emerging market central bank has changed in recent years, and a testament to the steely resolve of a man at the helm of the autonomy movement.

Guillermo Ortiz is widely credited with bringing economic stability to Mexico and, by banishing the spectre of hyperinflation that long haunted the country, laying the foundations for one of the deepest and most liquid local debt markets of any emerging market. But his efforts have also helped stoke demand for local currency debt across emerging markets, spawning a new and rapidly growing asset class.

“His presence has given investors comfort that policy-makers in Mexico know what they’re doing,” says Alonso Cervera, an analyst at Credit Suisse, who closely follows monetary policy.

Ortiz, a 61-year-old with a doctorate in economics from Stanford University, first took the reigns of Mexico’s economy as president Ernesto Zedillo’s finance minister between 1994 and 1997, helping to steer the country out of the devastating ‘Tequila Crisis’. Upon taking over as central bank governor in January 1998, his first battle was against lingering contagion from the Asian financial crisis, which was pounding emerging markets across the globe. More recently, during the current crisis, the central bank’s timely injection of dollars into the currency markets has been credited with halting a potentially disastrous slide in the peso.

In an interview with Emerging Markets in his downtown Mexico City office, Ortiz succinctly summed up his main achievements as having “brought inflation down... through a monetary policy framework people can understand”.

On his watch, Mexico has introduced inflation targeting and begun using a reference rate as its main monetary policy tool, replacing a complicated market ‘short’ system previously in place. But he says that in a developing country still struggling to turn stability into growth, technical issues make up only a fraction of his responsibilities.

“I believe that as the governor of an emerging market central bank, you sometimes have to go beyond the traditional role of the central bank and try to have influence over structural matters...” he says. “There is a job to inform, and convince.”

He is at his most vocal when trying to convince his fellow countrymen of the need for deep-seated reforms including an overhaul of one of Latin America’s most inefficient tax systems. He acknowledges that the stability he has helped bring to Mexico has brought enormous benefits, but he says it isn’t enough.“You can’t argue with stability,” he says. “But what we need is a series of reforms that give us a higher growth rate.”

“With the resources this country has, its population and its proximity to the United States, it’s really a shame that we haven’t had a better growth rate over the past 25 years.”

Ortiz’s reign will likely end very soon. His current, second term as central bank governor finishes in December. He is still young enough to serve again, though given his perceived differences with Calderon, few local observers believe the president will nominate him. But his legacies, at least, should remain firmly in place. —Greg Rosnan

Henrique Meirelles, Governor, Central Bank of Brazil

Meirelles has ensured the clout of Brazil’s currency – boosting the nation’s international standing along the way

Henrique de Campos Meirelles, in his earlier political days in government or more recently as central bank governor, has played a decisive role in turning Brazil from a black sheep among indebted emerging nations into a market darling.

He has been one of the key figures who have enhanced perceptions of the Latin American giant, allowing it to speak louder and to gain greater influence in international forums, including the IMF. “More and more countries have been accepting the idea of a rebalancing of power,” says Meirelles in an interview with Emerging Markets. “This is going to happen.”

Political efforts to boost Brazil’s impact in the reform of global governance have been led by president Luiz Inacio Lula da Silva and his finance minister Guido Mantega, but Meirelles has been a central player in restoring credibility and confidence in financial circles.

“The Brics [Brazil, Russia, India and China] had a successful meeting in London; we are discussing local-currency trade agreements; this is one area where we can cooperate. We can help balance the world economy,” he says.

The first local-currency trade agreement, which limits the use of the dollar to the minimum in bilateral transactions, was implemented with Argentina last year. “Operationally it is complicated, but this is a good project. It is cost effective. The experience with Argentina shows that such agreements grow slowly but steadily, and smaller traders benefit the most,” he says.

“Obviously the bulk of the trade is still going to be in dollars, but this local-currency trade is growing and it’s very promising.”

As Brazil has beefed up its reserves under Meirelles’ tenure, it has also become one of the largest holders of foreign exchange in the world with around $220 billion. There have been some recent changes in the composition of these reserves, but Meirelles has denied that Brazil would consider walking away from the dollar. “We are moving carefully on that line; we have a balanced portfolio. We do not intend to change that,” he says.

Domestically, Meirelles, who is the longest-serving central bank governor in Brazilian history, is confident that Brazil has emerged faster than most from the global financial crisis, and stronger than when it was sucked in by the credit crunch in the last quarter of 2008.

The central bank was able to restore credit to exporters and other market players through a series of market interventions even before relaxing monetary policy. Meirelles has argued that the subsequent cuts in the benchmark Selic rate and fiscal incentives had a more powerful impact because the credit market was already in a better shape.

“We only cut interest rates this January, when the credit market was functional and when monetary policy was already with some traction,” he says.

Brazil has gone through the most difficult economic period since Meirelles came into office in January 2003, and it has gained yet greater credibility, he says. He reckons that policy instruments have been tried, tested and found to work. More to the point, the economy is growing again. —Thierry Ogier

Zeti Akhtar Aziz, Governor, Bank Negara Malaysia

Malaysia, more than many of its emerging market peers, has staked its claim to being master of its own economic destiny. Monetary policy is a key part of that story

Zeti Akhtar Aziz, governor of Bank Negara Malaysia, the central bank, has lived through tumultuous times. During her time as assistant governor in 1995 and governor in 2000 she has witnessed the south-east Asian economic explosion, the regional financial crisis, food and commodity boom and busts, the global financial crisis and the dawning of political change in Malaysia.

Zeti, who has been at Bank Negara for more than half of Malaysia’s history as a federal state, has been a part of two movements that are likely to be seen as key to Malaysia’s long-term economic development.

The first is being a part of the country’s we’ll-do-it-our-way riposte to both financial crises a decade apart – a stance that is unlikely to change. Zeti was not the main architect of Malaysia’s strident approach to the Asian financial crisis, the prime minister Mahathir bin Mohamad was, but she was influential in implementing the policy.

She looks back on that time with evident pride, apparently feeling that lessons could have been learned by bigger powers last year. “Leadership plays an important role in being decisive, and we didn’t have a fragmented regulatory regime, which plays a very important role,” she says in an interview with Emerging Markets. “It all resided in the central bank.”

The central bank drove the launch of an asset management corporation to deal with the bad assets – “and we just called them that, bad assets” – an approach that, much doubted at the time, worked.

Malaysia’s approach, and Zeti’s, since then has been in keeping with this sense of a broader plan and an apparently healthy disdain for what the world thinks it should do.

Plenty is arguably wrong in Malaysia – competitiveness of its companies on a world stage, corruption in politics, the quality of the judiciary, and people will forever argue about whether the 1998 capital restrictions helped or hindered the country – but monetary policy has not been among the problems under Zeti’s governorship.

Instead, Malaysia has gradually loosened its foreign exchange and other restrictions, liberalized its financial sector at its own pace, and continued to do its own thing in the face of international opinion.

Along the way a much more viable freestanding banking industry has grown, one that has survived the global financial crisis unscathed.

This year she has driven through a new Central Bank Act which enshrines her institution’s independence, although she insists: “At no time in my entire career have we ever been instructed [by government]. During my tenure there have been six ministers of finance, and they have all made public announcements that the central bank decides interest rates and determines monetary policy.”

For all her monetary savvy, though, history may remember Zeti most for her contribution to the development of Islamic finance. Malaysia has the most sophisticated legal and regulatory environment in the world for Shariah banking, takaful (insurance) and asset management.

Although this has been a tripartite drive by finance ministers, Securities Commission chiefs and the central bank, it is Zeti who has been going around the world spreading the word about both the financial discipline and Malaysia’s role in it.

Having built a strong domestic industry, Zeti has been at the heart of the next step: to bring in international expertise and, ultimately, capital through the Malaysia International Islamic Financial Centre.

“We are evolving into becoming an international Islamic financial hub,” she says. “It’s a meeting place of those who need to raise funds or have surplus funds for investment from any part of the world.”

The jury is still out on whether she and Malaysia can achieve this next step – the foreign institutions have come, but not yet the portfolio flows – but if she does make Malaysia a global home for Islamic capital, it may prove the most significant contribution of all. —Chris Wright

Mohammad Al Jasser, Governor, Saudi Arabian Monetary Agency

Saudi Arabia’s central bank governor is setting out to transform the kingdom’s financial sector to match the nation’s global standing – with trademark prudence

SAMA, the Saudi Arabian Monetary Agency, has a well-respected and traditionally prudent monetary stance. The incoming governor, Muhammad Al-Jasser, who started this February, says that it will be business as usual under his command.

Al-Jasser has made it clear he is not about to ditch the conservative policies of the Saudi regulatory authority. As he said earlier this year: “While we have been accused of a lack of imagination, our basic strategy has been vindicated, and as such, our economy and monetary policy will continue.”

SAMA’s prudence, going back many years, has ensured that Saudi Arabian banks have not suffered the problems encountered by less rigorous monetary authorities elsewhere in the region.

With Al-Jasser, the prudence is married to a pragmatic approach that affords radical measures when needs must. “No risks are taken on the investment side, and on the monetary side SAMA is doing the right things to incentivize growth,” says John Sfakianakis, chief economist at Banque al-Saudi al-Fransi.

This year SAMA has deployed a large slice of the foreign assets it had invested in over previous years to provide a stimulus to the economy. Net foreign assets reached $438 billion by end-2008, but have been depleted by $56 billion over the first seven months of 2009, as the government engaged in a massive spending programme designed to limit the impact of the downturn.

Saudi Arabia is an integral member of the G-20 group of economies. It is also poised to play a more prominent regional role. Six of the Gulf Cooperation Council (GCC) states are attempting to create a central bank for the region in a drive towards monetary union. The plan, so far, is that the central bank will be based in Riyadh. If this goes ahead, al-Jasser’s brief will be greatly expanded.

Moves to create a financial centre in Riyadh around the central bank are inevitably difficult given the sensitivities and sensibilities of other GCC states. “SAMA does not want to impose itself on the region; it wants to help the GCC become more cohesive,” says Sfakianakis.

There are other challenges facing the SAMA governor this year. One is the issue of corporate governance and transparency, highlighted by large debt defaults linked to two prominent Saudi business empires, the Algosaibi and Saad groups.

The revelation of debts worth an estimated $15.7 billion owed by the companies to at least 80 banks, has compounded Saudi lenders’ risk aversion, at a time when the central bank is doing all it can to encourage them to increase lending. But Al-Jasser has made it clear that SAMA will not be buying up debts owed to local banks.

A bigger challenge ahead is how to enhance the role of the financial sector as a catalyst of Saudi economic growth. The kingdom’s position as the world’s leading oil exporter has endowed it with a massive influence on the global economy, and one that will increase over time as non-Opec (Organization of the Petroleum Exporting Countries) supply wanes.

“SAMA needs to make sure that Saudi Arabia’s financial sector plays a role that matches its global standing. The role of banks is critical in that,” says Jarmo Kotilaine, chief economist at NCB Capital. — James Gavin

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