The Impact Of Sovereign Wealth Funds On The World Economy

Although the history of sovereign wealth funds is not very long, its developmentis extremely rapid. As the size and the amount of the sovereign wealth fund increase,its influence on the world economy–not only the real economy also the financialaspects of the virtual economy, have had a tremendous impact. So, this paper is goingto research these effects, mainly from the three major aspects which are theinternational balance of payments, financial markets, and regulatory rules. This paperis divided into seven parts.The first part is an introduction. This section describes the research backgroundand combings the literature about the concept of sovereign wealth funds, the statusquo, the reasons for the rise and the process, the impact on the world economy, themanagement and supervision of the sovereign wealth fund, the status quo of China’ssovereign wealth fund, and then makes summarizes and comments. This section alsodescribs the research method and structure of the paper, and the innovations andshortcomings of this study.The second part is an overview of the sovereign wealth funds. Looking back athistory we can find that since the first sovereign wealth fund was born in the1950s,the world’s sovereign wealth funds are in the process of continuous growth. Both thesize and number of sovereign wealth funds Increase.The reason is not only thesovereign wealth funds’ home country’s foreign exchange reserves increase, but alsothe pursuit of efficiency of investment and other internal and external factors,including global economic imbalances. At present, there are variety classifications ofsovereign wealth fund. The IMF classification is most popular. Although sovereignwealth funds are more or less mix with political factors, but the form of organizationcommonly used by corporate system. The different nature of the sovereign wealthfund determines its form of investment are different, but the investment risks are verysovereign wealth fund must face to.The risks faced by the sovereign wealth fund canbe divided into internal and external risks. Internal risk is the risk of loss due to their own mismanagement; external risks are mainly derived from the asset or commoditymarket price fluctuations and the host country political risk. Various countries payattations to the regulation of sovereign wealth funds, these regulations not onlypromote the development of the sovereign wealth funds, but also to some extentconstitute an obstacle to their development.From international capital flows and international asset prices, the third partresearch the sovereign wealth fund impact on the the international financial market.Before the outbreak of the global financial crisis which triggered by the U.S.subprimelending crisis, the region which the world’s sovereign wealth fund invest inis the main OECD countries. In the aftermath of the crisis, some of the funds beginflows to emerging market countries. Therefore, the sovereign wealth fund changes theinvestment tactics with the changes in the international economic environment andinvestment risks and gains. Different from the private sector funds, sovereign wealthfunds focus on long-term investment. The fields sovereign wealth invests in are moreand more, but the main is still the financial and real estate-based, then the industrial,energy, consumer goods and medical industry. If the transparency of sovereign wealthfunds reached the requirements of the receiving country, sovereign wealth funds notonly in favor of the home country and the host country, but also have a positiveimpact on the areas where the two countries in. Sovereign wealth funds take intoaccount the safety and liquidity when they consider the configuration of asset classes,and they invest distributly and long-term. This phenomenon is more obvious after thesubprime mortgage crisis. Sovereign wealth fund holdings of cash assets and reducefixed-income assets to improve the liquidity of the assets. SWFs will have an impacton international capital flows of the financial markets, but the effect is still limited.By summarizing the study of the early scholars, the paper argues that sovereignwealth funds have a certain impact on the international financial market, but theimpact is still limited, and doesn’t cause a wide range of financial asset pricesfluctuations.In the fourth part of the paper, we study the SWFs’ influence to the world’s economyfrom three aspects as flows: intensification, maintain and adjust of internationalpayments imbalances. The imbalance of international payments is an important reason for the development sovereign wealth funds, because the rise of the price ofresource commodities and the development of foreign exchange reserves of emergingmarkets. In turn, the sovereign wealth fund has become an important support tomaintain this stage imbalance of international payments, because the sovereignwealth funds reflux some financial flows back to the trade deficit country to supportthe trade deficit in next stage. At the same time, however, the sovereign wealth fundscan promote the improvement of the structure of the international reserve currencytoo.The fifth part from the attitude of the national to sovereign wealth fund examinesthe international regulatory guidelines established about sovereign wealth funds fromformation to implementation. Currently, the attitude to the sovereign wealth fund isstill boycott, mainly from the country’s economic security, national competitivenessof enterprises, and other factors to consider. Due to the lack of liquidity in the marketin times of crisis, the hard-line attitude will temporarily ease. Because of the concernsof the international community of sovereign wealth funds, some measure of controlcame out such as "Santiago Principles" and other international regulatory standardsand transparency metrics. International regulatory standards, however, is notmandatory, so the lower binding behavior of sovereign wealth funds. This paperargues that the international governance of sovereign wealth funds, relying solely oninternational regulatory standards is unrealistic, so it also needs a set of relativelyeffective international coordination mechanism.The sixth part looks ahead the future of sovereign wealth funds and on this basis,this paper focus on China’s sovereign wealth fund. From the short-term future, theworld’s sovereign wealth funds also will face with a series of uncertainties. Inaddition, the European debt crisis is so full of great uncertainty of the future of theworld economy. Therefore, in the context of short-term, the world economy situationis full of uncertainty; the sovereign wealth fund is still facing greater risk. But in thelong run, the momentum of the development of the world’s sovereign wealth fundswill continue for the better, the scale will continue to expand, so the short-termeconomic shocks on sovereign wealth funds, both a challenge and an opportunity. Inrecent years, China has established some sovereign wealth funds with the rapid growth of the scale. Although there are still many inadequacies, but on the whole, thelevel of investment is still rising. With China’s economic position in the worldeconomy continues to enhance the size of the Chinese sovereign wealth fund isincreasing, and China is currently held by the huge foreign exchange reserves andother factors, China’s sovereign wealth funds becomes a very important force.The seventh part contains conclusions and implications. There is a summary ofthe full text contents. This article has also been some enlightenment. With thegrowing influence of sovereign wealth funds in the world economy, the impact ofChina’s sovereign wealth funds will also increase-especially under the conditions ofthe scale and quality of the Chinese sovereign wealth funds have increased. Due tothe special nature of the sovereign wealth fund, the host countries will inevitably payspecial supervisions of sovereign wealth funds. China’s sovereign wealth funds willalso be subject to "take care" exception. China’s sovereign wealth funds, under thepremise of not exposed to investment intentions should actively improve their owntransparency, effective communication with the host country, and take the initiative toadapt to international rules. China’s sovereign wealth funds’ impact on the worldeconomy should be multifaceted and all-round. In fact, the increase of Chinesesovereign wealth funds’ investment in the proportion of non-financial assets is theprocess of the increasing influece which Chinese sovereign wealth fund have made.This process not only has an impact on the world economy, but also will enhance thebeneficial influence of China-especially the economic interests and the economicsecurity.