The governor of the People’s Bank of China (PBoC), Zhou Xiaochuan, had some days ago an interesting interview with the financial magazine Caixin. You can find the English transcript here. The initial part of the interview is really worth reading (and not so much the last part, which deals with criptocurrencies and other topics that are not “core issues” for the PBoC at the moment). Right at the beginning Zhou talks about the prospects of an additional (or not) depreciation of the renmimbi and how China has moved from a dollar-peg regime to a basket-currency regime (although such baskets are still very loosely defined). And by the way, he is not very concerned about international reserves going down (around 100USD billion in January), because he thinks this process is mainly driven by Chinese firms trying to reduce their foreign currency denominated liabilities, a process that (obviously) will not be endless. As he says:
As such, it is necessary to distinguish capital outflows from capital flight. It is normal for export-oriented enterprises to choose their foreign exchange conversion strategies and adjust their liability structures after weighing benefits and costs. Such adjustment will not be endless. Such behaviors do influence capital flows and foreign exchange reserves, but they do not necessarily constitute capital flight.
But the most interesting part of the interview is when he talks about investment expenditures. Although he does not address explicitly in these paragraphs the rebalancing process (how to reduce current investment levels and increase at the same time consumption without any disruption), it is clear that some conclusions for the rebalancing issue can be drawn from the following statement [emphasis added]:
February is always a very sad month for the Spanish financial industry, and this February has not been an exception. Pablo Fernández, professor at the IESE Business School, and collaborators have published the latest version of their annual paper on the returns of pension funds in Spain. The paper of this year, ‘Return of Pension Funds in Spain. 2000-2015’, studies the track-record over the last fifteen years of the 322 Spanish pension funds that have been in existence at least for fifteen years. You can find the paper here. The main takeaway? The performance of the pension fund industry in Spain has been simply terrible. Well, it has been even worse than that. As the authors succinctly explain in the abstract (unfortunately the paper is only in Spanish):
During the last 15 year period (2000-2015), the average return of the pension funds in Spain (1.58%) was lower than the return of government bonds (5.40%). Only 1 fund (out of 322) had a higher return than the 15-year government bonds. Nevertheless, on December 31, 2015, 7.8 million investors had 67.6 billion euros invested in pension funds.
What the abstract does not say (but the paper does) is that with an average return of 1.58%, pension funds were not even able to beat inflation! More details: only 2 funds (out of 322) outperformed the Ibex 35 (the main Spanish stock market index), only 1 fund outperformed 15-year government bonds and 47 displayed in average negative performance. Although the paper gives us more interesting details (very small correlation between fund size and return, no correlation between number of beneficiaries and return, etc.), the crucial part is about returns and how pension fund performance compares against other benchmarks. In other words, pension fund performance has been simply embarrassing and it should make us to think why one should invest in one of these vehicles. And as it was reported by Félix López one year ago in this blog, the 2014 paper by Pablo Fernández and collaborators reached the same conclusion: pension fund performance has been consistently dismal.