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Rise, Cause And Influence Of The Sovereign Wealth Funds In Emerging Market Countries

Posted on:2010-12-07Degree:MasterType:Thesis
Country:ChinaCandidate:L Y DaiFull Text:PDF
GTID:2189360272996108Subject:World economy
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Sovereign wealth funds as a country's sovereign investment agencies have already existed in the international financial markets for half a century. In the past, sovereign wealth funds were mainly set up by developed countries and oil exporting countries. It hasn't caused too much concern to the international community until some emerging market countries formed their own sovereign wealth funds at the beginning of the twenty-first century. It is really a strong shock to the international community especially the developed countries when they heard that emerging market countries such as China and Russia have found their own sovereign wealth funds. According to an estimate by Merrill Lynch, by the beginning of 2008, about 40 countries offered sovereign wealth funds in the world, the total asset of which reached approximately USD2 trillion to USD3 trillion, 2.5% of the global financial assets and more than that of hedge funds and private equity funds. From the beginning of the sub-loan crisis, sovereign wealth funds of emerging market countries have poured USD41 billion into western financial institutions. The governments of some developed countries put up an obvious anxiety about the coming of sovereign wealth funds, especially by throwing out the"Theory of Threat from Sovereign Wealth Funds"towards the issuance of China's sovereign wealth funds. Therefore, there is a need to conduct a detailed and in-depth study of emerging market countries'sovereign wealth funds, especially the causes of their emergence and the impact on the world economy. It will help to correct and mitigate the theory of threat from emerging market countries'sovereign wealth funds fabricated by the developed countries.The current studies mainly focused on the traditional sovereign wealth funds of oil exporting countries, and have already formed a large number of research results. But there is much less research towards emerging market countries'sovereign wealth funds and much of which is scattered among relevant articles. The purpose of this thesis is to, on one hand make a complete analysis of the rise, causes and its impact on the world economy, as to complete and deepen the understanding of emerging market countries'sovereign wealth funds and correct the unjust evaluation of it from the international society; on the other hand, by exploring the current problems of its operation, we can put forward some specific measures to enable emerging market countries'sovereign wealth funds play a greater role in increasing a country's national wealth.The rise of emerging market countries'sovereign wealth funds can be summed up separately as subjective reasons and objective reasons. Subjective reasons can be summed up in five points. First, most of emerging market countries have a universally single income mechanism which sustained economic growth mainly by means of exporting raw materials and processing products. Choose to set up sovereign wealth funds to invest abroad, it could provide another alternative income for emerging market countries. Second, hit by financial crisis, emerging market countries all attach great importance to the accumulation of foreign exchange reserves. However, there is high opportunity cost of huge foreign exchange reserves, so with the original intention of preserving and increasing the value of foreign exchange reserves, emerging market countries choose to found sovereign wealth funds in seeking higher yields. Third, some oil exporting countries established such investment institutions as sovereign wealth funds with the purpose of balancing the wealth across generations to prevent future generations from losing income sources because of the exhaustion of energy, while the sovereign wealth funds of emerging market countries bore the same intention. Forth, as emerging market countries are experiencing booming economic growth, promoting the development of domestic specific industries and assisting in industry reformation constitute two of major tasks of their sovereign investment institutions. Fifth, by setting up sovereign wealth funds with a wide range of overseas investment can preserve and increase the value of assets, and also can effectively alleviate the devaluation of the exchange rate risk of the dollar against the yen and other Asian currencies, reducing the probability of financial crisis. Objective reason from the perspective of global economic imbalance has come to the conclusion that the twist of current international monetary system is the root cause of emerging market countries'excessive foreign exchange reserves. It is the unreasonable international monetary system which tolerant some developed countries'irresponsible laissez-faire monetary policy and money creation that has contributed to the current rapid growth of emerging market countries'foreign exchange reserves, which resulting in emerging market countries have a huge foreign exchange reserves exceeding appropriate size. It is this part of exceeding appropriate size of the foreign currency reserve assets that emerging market countries use to set up their sovereign wealth funds.Emerging market countries'sovereign wealth funds have affected the world economy in five specific areas. First, it would have impacted the pattern of international reserve currency. For the concept of investment diversification, the investment of emerging market countries'sovereign wealth funds will no longer be limited to U.S. dollar assets, which would bound to cause a drop in demand for U.S. dollar and a rise in the demand for the euro and other investment areas'reserve currency. This would indirectly affect the pattern of international reserve currency. Second, it would have impacted the international financial markets. On one hand, as long-term investors, emerging market countries'sovereign wealth funds have continued to provide a healthy finance for international financial markets, played a role in stabilizing the market; on the other hand, because of lack of investment experience and sophisticated management, combined with their background of government strategy it was easy to cause conflict when invest in other countries, which will bring certain negative effects on international financial markets. Third, it would have impacted the international capital markets. Huge foreign currency reserve assets invested in international capital markets will increase the supply of money. The supply of excess funds might drive the price of stocks, bonds and other assets. In addition, the appearance of emerging market countries'sovereign wealth funds has made the investment institutions in developed countries no longer the only subject to international capital markets, reducing gap between the developed and developing countries to invest in the capital market. Fourth, it would have impacted the global economic imbalances. Emerging market countries'sovereign wealth funds invest in a wide range of selection methods, no longer limited to the purchase of developed countries'assets, especially the United States Treasury and agency debt, which has changed to some extent the "deficit financing" policy of developed countries which can ease the degree of twist of the global economic imbalance. Fifth, it would have impacted the pattern of the world economy. The found of merging economies'sovereign wealth funds have improved the developing countries'social status in international economic, and fully reflects the pattern of the world economy from unipolar to multipolar hegemonic trends in the evolution of the world economy which will result in more balanced pattern of the world economy.Sovereign wealth funds of emerging market countries operate under the influence of US subordinated mortgage crisis, with development opportunities and challenges coexisting. In terms of challenges, first, it is hard to determine the perfect time for investment. Second, it is hard to select high-quality financial products because of their complex structures. Third, investment is subject to the boycott from developed countries. The developed countries have set up many restrictions for investment. Fourth, due to the depreciation trend of US dollars in recent years and intensified fluctuation of international financial market their invested financial products continuously devalued. In view of development opportunities, on one hand, for the financial institutions suffering from the financial crisis, the sovereign wealth funds of emerging market countries have plenty funds without pressure of short-term earning and their investment is more stable than that from such private equity fund investment as hedging fund, which is propitious to improve the assets of invest and meet their financing requirements caused by capital scarcity. Moreover, the investment strategies of sovereign funds of emerging market countries are less aggressive and completely respect the intention of invest generally without the requirements on seats of the board of directors, which is more acceptable for those top-level financial institutions. On the other hand, it is a good opportunity to transform their industrial structures for emerging market countries. China or other emerging market countries cannot develop depending on exporting primary finished products and raw materials, as only well-developed finance is crucial for a country's economic development.There are some suggestions for China's sovereign wealth funds. First, China shall value the suggestions from international economic organizations and improve its transparency. Second, it shall select the investment strategies as carefully and simply as possible. China's sovereign wealth funds as newly founded are still lacking in experiences and therefore shall be prudent in making investment strategies instead of sticking their chins out to win. Third, it shall be expert in hedging risks while selecting financial products to make an investment. Some expert once introduced the risk hedging theory into foreign exchange management. China Investment Corporation can draw lessons from this theory by introducing risk hedging into management strategy of investment in foreign countries. While selecting investment projects in foreign countries, they shall select the industries and companies in those countries or regions with small positive correlation or even negative correlation with China's economic fluctuation to ward off the potential risks in China's economic growth in the future. Fourth, they shall attract the talents full of investment experiences as many as possible to learn the experiences from those successful investment institutions. It is a perfect time to recruit talents when many such financial institutions as the famous investment banks in Wall Street went bankrupt and reorganized due to the subordinated mortgage crisis and many elites of investment in Wall Street including Chinese elites lost their jobs. China, with its top-ranked foreign exchange reserves and well-known contributions to the economic development of the whole world, has been well equipped with foundations and conditions to get involved into developing international rules. Therefore, we shall proactively join in developing international rules of sovereign wealth funds with an aim of peaceful development, communication with each other, mutual benefit, cooperation and harmony. Sixth, they shall avoid from political investment to cut down political risks. The barrier for the investment of sovereign wealth funds lies in financial protectionism which means that the investment always suffer a big loss due to boycott or default by host countries for protecting their own economies. In some sense, the investment of sovereign wealth funds is confronted with the test of political environments, especially in China. China Investment Corporation shall downplay its investment to avoid political interference and cut down political risks. Seventh, laws and regulations shall be improved to standardize the investment of China Investment Corporation. Nowadays, all the countries have attached key importance to the laws and regulations in sovereign wealth funds. It is necessary for a country to develop special regulations for these funds. China has considered developing relevant laws and regulations such as National Corporate Act of Foreign Exchange Investment to regulate the acts of Chinese foreign exchange investment companies, define their responsibilities, enhance investment quality and earnings, strengthen the regulation management and risk control and promote their sound operations, thus maintaining the value of foreign exchange assets. Eighth, they shall set up a bidirectional risk prevention system with a reasonable cognition of China's double identity. China shall not only pay attention to the obstacles with which domestic sovereign wealth funds is confronted during its investment in foreign countries, but also be aware of the influence on China's economy of the influx of other countries'sovereign wealth funds.
Keywords/Search Tags:emerging market countries, Sovereign Wealth Funds, foreign exchange reserves, the international monetary system
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