The Sovereign Wealth Fund wasconceived by a person named Andrew Rozanov (August 2005, p.6).
Sovereign WealthFunds (SWFs) are not only diversified but also have a long history. Thediversification of SWFs is reflected in geography, capital source, size, ageand investment strategies. The first SWF was establishedin 1953 called Kuwait Investment Authority and the first industry associationwas founded in 2007, which is International Working Group (IWG) (Aldo & Emil, 2011,p.6). That is to say, IWG is quite important for SWFs. According to Aldo& Emil (2011), they argued that the definition of SWFs includes GovernmentPension Fund of Norway, the Chinese Investment Corporation and Kiribati’sRevenue Equalization Reserve Fund. In the view of Ian Bremmer (2010, p.
7), he defined SWFs as “state-managed pools of excesscash that can be invested strategically”. At the same time, thereis also an understanding of SWFsin the Santiago Principles. SWFs are accumulated through thedistribution of specific taxes and budget allocation, the balance of payments surpluses,etc.
(SantiagoPrinciples, 2011, p.21). Inanother aspect, ownership, investments and purpose and objectivesconstitute three critical factors for SWFs (Santiago Principles, 2011, p.21).Ownership is reflected in SWFsbygovernment control and allocation.
The key investment strategy ofSWFs is thatthey are owned by a number of sovereign governments for long-term foreignfinancial investment. Thus, the purpose and objective of SWFs are to usethe government’s funds to achieve the original financial goals and reduce thedebt, and to undertake certain investment risks. According toinvestment and capital (Aldo& Emil, 2011, p.8), SWFs can be divided into four categories: saving andpension reserve funds, stabilization funds, economic development funds andreserve investment corporations. Saving and pension reserve funds were set upto better preserve capital for future generations. The scale of these funds is usuallylarge and old and are mainly concentrated in the developed market. Besides, therisk of inflation can easily affect saving and pension reserve funds, so it isthe key to maintain and increase the value. Stabilization funds found in thelast 20 years and these funds are established by the government and centralbank in order to effectively reduce the impact of commodity price fluctuationsor inflation.
That is, the main purpose of stabilization funds is to stabilizethe countries’ fiscal expenditure, especially in the period of the recession. Economicdevelopment funds are to promote economic diversification under the conditionof abundant national resources. Direct investment has become the first choicefor these funds, but still some of them focus on the domestic economy (Aldo & Emil, 2011,p.9). Reserve investment corporations are to reduce theflow of foreign currencies, and better to manage the risk of currencies and usethe risky investment to achieve high returns. For example, Chinese InvestmentCorporation is ones of the largest sovereign wealth funds in the world.There is nothing to be afraid of SWFs because they aregrowing and strengthening.
SWFs have the financial strength of a large pensionfund, which is reflected in the flexibility of venture capital. In addition,SWF industry is more concentrated than other industries of the same kind. Throughthe large number of foreign exchange funds that some central banks have tosupport SWFs assets, which can be developed organically through the currentinvestments’ appreciation (Aldo& Emil, 2011, p.9). There are also some benefits that can be shown notto be afraid of SWFs.
Firstly, SWFs not only bring benefits to their owncountries but also enhance their competitiveness of natural resources andexports in the world, so as to get rid of the single national economy. SWFs transfersome consumable natural assets into some permanent income financial assetsthrough the liquidity of the resource exportation (Aldo & Emil, 2011, p.9).
Secondly, stabilization funds help to prevent domestic monetary losses fromdomestic shocks, thereby promoting the growth of the financial economy andstrengthening national security against foreign attacks. Thirdly, large institutionalinvestors reflected by SWFs can help improve the return of the capital market,while reducing transaction costs make large investors can also benefit from it,have more investment opportunities, and help reduce risk (Aldo & Emil, 2011, p.10).SWFs can stabilize the impact of the financial crisis on the market and keepinvestment in a period of undervaluation. Furthermore, SWFs have played animportant role in the survival of many financial systems in the financialcrisis.
Finally, the removal of capital restrictions can bring some benefits. Fundsowned by SWFs are conducive to large-scale, high-risk investment, and their availablecapital which is much more than the source of the traditional emerging markets(Aldo &Emil, 2011, p.11). In a world, SWFs benefits outweigh thedisadvantages, so do not have to be afraid of them.SWFs need to be regulated due to the emergence of someproblems. The most common criticism of SWFs is their poor management or poorallocation of capital. This problem is the one that needs to be corrected themost.
The key to solving this problem is to adjust. In other words, not onlythe supervision of the regulator, but also the internal needs to bestrengthened. This can reduce the damage caused by the financial crisis andminimize its losses. SWFs are in charge of financial bubbles. If there is noregulation, the financial bubbles are breaking out quickly and they have a widerange of impact. The emergence of financial bubbles can cause a stock marketcrash, a large number of debt crises and harm the global financial system tomake its stable system damaged.
In order to avoid this kind of harm, financialinstitutions should better control investment, not excessive investment andpursuit of economic growth blindly. The system of financial institutions wouldbe threatened without regulation. Private financial companies have to deal withregulations that can not only limit their size but also control their exposuresto risky assets (Aldo& Emil, 2011, p.
12). When debt financing occurs, the introduction of marketdiscipline can better improve and govern companies and consolidate riskmanagement. Political incentives can cause confusion in some financial institutionsor damage to reputation. The government should strengthen the political risk ofoverseas investing and make clear the moral standards of some investments tomake the financial system more perfect. The political motives of SWFs have beenblamed for the lack of transparency and SWFs’ investments may affect themarket. For countries with SWFs, profits and international capital flows canbring adverse changes. OCED and IMF should work together with SWFs to establisha set of governance and transparency guidelines for the fund, so that SWFs canoperate and regulate better and improve the ability of risk management.
Thefinancial protectionism can put SWFs at risk. That is to say, SWFs arecontrolled by the government, and threaten their own economic security if theydo not comply with market rules. The government should curb the financialprotectionism effectively and better regulate SWFs. Generalspeaking, SWFs are the controversial issue. The supervision of SWFs should letthe state make their decisions and rely on bilateral agreements or it can create a cross-border investment regulatory agency.
The World Trade Organization would be a good example (Aldo& Emil, 2011, p.14). I learned that SWFs as the most importantinstitutional investors in the world, have made important contributions toglobal economic security and financial stability. Secondly, in the period ofthe financial crisis, the SWFs helped to reduce the risk of financialinstitutions and maintain the stability of the global financial market. Finally,the SWFs will become an important source of capital in the financial market andwill promote the growth of all kinds of asset transactions, accelerate andadjust the global asset allocation pattern, and slow down the price fluctuationof the market.