Appreciation of the Role of Sovereign Wealth Funds in the Global Economy
Published in: Public Finance Quarterly 2015/2 (p. 270-287.)
SUMMARY: This article is intended to explore the reasons behind the accumulation of massive foreign currency assets in oil exporting and large manufacturing economies in the 2000s, and to explain how the affected countries adjusted their investment policies after the 2008 crisis in respect of their reserves. Based on the statistics and analyses available, the article demonstrates how it was inevitable in these countries to dedicate a substantial portion of the claims – in excess of the optimum central bank reserves – to set up large public funds (“sovereign wealth funds”), and to invest a part of the assets in those funds abroad. This proved to be a wise solution particularly in China, where fiscal reasons render the economy prone to overheating in any case, and the unrestricted exchange of export receivables to the domestic currency would make the money supply balloon, leading to high inflation. Although low-risk but also low-return money market investments had dominated sovereign wealth funds for a long period of time, the countries concerned have changed their investment policies since the crisis, gradually shifting their focus to capital market options promising higher returns. Owing to the tightening of regulations in the wake of the crisis, banks’ previous role in project finance was called into question, especially in the case of infrastructure project financing, which is associated with a long-term return on investment. This provided an additional investment opportunity for the funds. At the same time, through the investment activity of funds, a peculiar nationalisation process is at work in the global economy, allowing funds owned by foreign governments to interfere with the strategic decisions of private corporations.
KEYWORDS: sovereign wealth fund, nationalisation, China–USA economic relations, long-term financing
JOURNAL OF ECONOMIC LITERATURE (JEL) KÓD: F02, F32, F34, F62, F63