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The Development of Sovereign Wealth Funds and Implications for China

Author: ZuoLiChun
Tutor: DengLiLi
School: Dongbei University of Finance
Course: International Trade
Keywords: Sovereign Wealth Funds operation management investment strategy CIC
CLC: F124
Type: Master's thesis
Year: 2010
Downloads: 141
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Abstract

As a new investment instrument, sovereign wealth funds dated from 1950s. In 1953, Kuwait government established the first sovereign wealth funds of the world. Later, with the development of financial globalization and the free movement of capital, sovereign wealth funds started to develop quickly. At first, compared with other funds, the scale of sovereign wealth funds is small, its investment is covert, so it has not attracted global attention. But recently, as with the sharp rise in oil prices and further aggravation of international payments imbalances, sovereign wealth funds are rapidly increasing both in quantity and in size. In addition, because of its special status, its investment flows and motivation also attracted world attention especially in western countries.In the recent years, some countries, such as Russia, China and so on, set up their funds one by one, India also announced it will establish their own sovereign wealth funds. This has caused the worry of western countries. Although because of subprime mortgage crisis, the recession of the America economy brought negative effects to sovereign wealth funds, at the same time, it provided new opportunities as the companies of western countries lack of capital under the condition of finance crisis. All the sovereign wealth funds of different have participated in the international financial mergers and acquisitions positively, which not only provides a huge amount of money for the U.S. economy, but also plays a certain role for global financial stability; otherwise, the development of sovereign wealth funds are also changing the pattern of global economy and promote the development of some countries such as China.The development of sovereign wealth funds has become an irreversible trend under certain historical conditions. Before the establishment of sovereign wealth funds, the foreign exchange reserves of countries that export resources or have trade surplus increased dramatically, but the way of managing foreign exchange are generally conservative. Under the consideration of the safety and liquidity of assets, foreign assets are invested to government bonds and institution debt of developed countries by the countries’bureaucracy of foreign exchange. Recently with the change of the environment of international economics development, investing these foreign exchange reserve assets to developed countries’government and agency bonds is hard to get profits, and even face the risk of negative income return. Therefore, these countries set up sovereign wealth funds as new investment channel to alleviate the adverse effects. The development of sovereign wealth funds is conducive to world economic stability and development, optimize resource allocation and increase the value of asset. For developing countries, sovereign wealth funds provide the channel of oversea investment, alleviate the pressure of currency appreciation due to excessive foreign exchange reserves and enhance their international status:for developed countries, sovereign wealth funds as fire brigade in the subprime crisis provide the capital and stabilize the economy. But sovereign wealth funds have caused concerns in the western countries because of less disclose and low transparency about sovereign wealth funds. Sovereign wealth funds have sovereign nature, so the investment host countries suspected that they have political motivation, and trying to hinder the development of sovereign wealth funds through protectionism.All in all, so far,37 countries or regions have established their sovereign, wealth funds and the number of the funds has reached 51, mainly in Middle East, Asia and other places. Although the world economy is affected by finance crisis, the growth rate of sovereign wealth funds has slowed down, the tendency of development in the long time has not changed. According to Deutsche Bank, the total size of sovereign wealth funds will exceed the sum of foreign exchange reserves of central bank by 2015. Sovereign wealth funds will become an important participant in the international finance market and play an important role in the stability of global finance market. At present, some countries have succeeded in the operation of sovereign wealth funds and become a model for other countries to learn. In 2007, China set up its sovereign wealth fund----China Investment Company Limited (CIC), which invest equity, fixed income and other assets within the global, and achieve the maximization of long-term investment return. But because of the late establishment and being in its infancy, the company has many problems. So in the paper, first, introduce the concept, nature and characters of sovereign wealth fund; second, study the developing history, scale and tendency; third, analyze the typical sovereign wealth funds-----the Abu Dhabi Investment Authority, Norway Global Pension Fund, Singapore Investment Corporation and Temasek Holdings, and the Russian sovereign wealth funds. Study the management system, investment strategy and other aspects and then form the better suggestion for CIC. Finally, analyze the internal structure, investment strategy, current development and existing problems, and then provide some advice for CIC, including defining the nature clearly, run the management structure separately, improving the investment strategy, establishing a sound legal system and strengthening the external management.

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