SINGAPORE -- Sovereign wealth funds in Singapore have long played a key role in the city state's wealth-building. Temasek Holdings, in particular, has greatly contributed to this effort by betting heavily on China. But recent declines in Chinese stocks and the yuan are testing its skills and ingenuity.
Temasek, an investment company owned by Singapore's government, holds assets worth over 300 billion Singapore dollars ($219 billion). Disclosures of the fund's past and current investments reveal how it has adjusted its strategy, spotting and taking advantage of the most important recent structural change in the world economy: China's rapid growth.
As of the end of March, Temasek's China-related investments accounted for 26% of its overall portfolio, nearly as great a share as its Singapore-related assets, at 27%. This represents a dramatic shift in the fund's asset allocation since the early 2000s, when most of its holdings were domestic investments.
As of the end of March 2004, investments in Singapore made up 52% of the total, while China, together with Taiwan and South Korea, accounted for just 6%.
Temasek began stepping up its investment in Chinese assets in 2005, when it acquired stakes in Bank of China and China Construction Bank. Since then, the Singaporean fund has amassed a pile of Chinese assets, mainly shares in the country's big financial institutions.
The fund's strategic shift has paid off. In fiscal 2017 ended March, based on estimates from company disclosures, the value of Temasek's holdings in five Chinese equities -- China Construction Bank, Industrial and Commercial Bank of China, Ping An Insurance, AIA Group and Alibaba Group Holding -- rose by around $9 billion. That contributed greatly to the $24 billion rise in the total value of Temasek's assets over the period.
Temasek's portfolio yielded a return of 12% in fiscal 2017, helped by sales of part of its stake in ICBC. The fund has also made new investments in Chinese concerns with solid growth prospects, such as a genomics company WuXi NextCODE. The fund is always on the lookout for promising investment targets.
The downside of Singapore's big bets on China, however, is exposure to an economic slowdown in the country. "We don't expect a full‑blown trade war, with punitive tariffs on a wide range of goods and a wide range of countries," said Michael Buchanan, head of strategy at Temasek.
But there are no guarantees. The Shanghai Composite Index plunged to a fresh year-to-date low of 2,705 on Monday, and it is approaching the trough of 2,655 that it hit in early 2016. The yuan has fallen 9% against the dollar from a high of 6.27 in March and April.
Depending on how the economic tug of war between Beijing and Washington plays out in the coming months, fiscal 2018 could sorely test Singapore's financial and economic ingenuity.
Direct investments are not the only way the fund has benefited from China's remarkable economic growth. The fund's China portfolio also includes investments in China made by Singaporean companies that it holds stakes in. The more globalized these Singaporean companies become, the greater the share of overseas assets in Temasek's overall portfolio.
For instance, Temasek owns a 40% stake in CapitaLand, a big Singaporean real estate developer. CapitaLand is spending SG$4.9 billion to build a large commercial complex in Chongqing.
"It's only to be expected that we will find more opportunities outside Singapore than inside Singapore," said Rohit Sipahimalani, joint head of Temasek's portfolio strategy and risk group. Thus, it is only a matter of time before Chinese assets make up the largest slice of its portfolio.
Singapore is unique in that its government incorporates profit generated by its sovereign wealth funds into its national budget. Temasek and the city-state's other sovereign wealth fund, GIC, are forecast to contribute SG$15.8 billion to government coffers in fiscal 2018.
The two funds' combined contribution is a larger source of revenue than Singapore's corporate tax or sales tax. The strong performances of these funds are crucial to the country's fiscal health.
The Singaporean funds' China-focused investment strategies stand in sharp contrast with their Malaysian counterparts, which mostly hold domestic assets.
Malaysian sovereign wealth fund Khazanah Nasional has been far slower to expand its Chinese holdings than its Singaporean rivals. Chinese assets make up just 7.6% of Khazanah's portfolio, while domestic investments account for 55.5%. Malaysia's other sovereign wealth fund, Permodalan Nasional, is even more insular. Domestic assets make up 97.8% of its investments.