After a booming year in 2007, Sovereign Wealth Funds (SWFs) are expected to see another year of marked growth in their investment in 2008, said a researcher Sunday.

 

The SWFs are pools of money derived from a country's foreign reserves, which are set aside for investment purposes to benefit the country's economy and citizens.

 

Accumulated as a result of budget and trade surpluses, they typically have a higher risk tolerance and higher expected return than traditional official reserve management.

 

Currently 36 countries or regions have their SWFs, with some 2.5 trillion U.S. dollars of assets under their management, bigger than the sums invested in hedge funds and private equity funds, according to a report by the Standard Chartered.

 

Abu Dhabi of the United Arab Emirates has what experts believe the world's biggest SWF, with an estimated value of 900 billion dollars. Meanwhile, recent news report said Saudi Arabia plans to establish a SWF that is expected to dwarf Abu Dhabi's assets to become the new number one in the world.

 

These funds, though still much smaller than official foreign currency reserves of their owner countries, are expected to grow rapidly to exceed the reserves in a few years, said Yuan Huaizhong, a researcher at the Research Institute for Fiscal Science, a leading financial research body in China.

 

If they keep growing at their present pace, their total value would reach 13 trillion dollars over the next decade, predicted Martin Wolf, chief economic observer of the Financial Times.

 

The SWFs, owned by sovereign entities in countries such as Singapore, Russia, Norway, Japan and China, have contributed significantly to the world economy, said Yuan.

 

They have played an increasingly active role in channeling capital to companies in need, adding tremendous liquidity to the markets they invest in and helping countries with the optimal allocation of resources, he said.

 

The SWFs usually adopt a long-term approach, and choose to invest in economic entities, said the researcher.

 

With their operations more stable than other funds, they bring more benefits to greater numbers of countries and their people, he said.

 

That was best demonstrated in their role to address the aftermath of the U.S. subprime mortgage crisis which began in mid-2007, said Yuan, noting the SWFs have poured money into those Western companies hard hit by the crisis.

 

In the past few months, the SWFs have injected about 29 billion dollars to help prop up the balance sheets of troubled banks, such as a 10-billion-dollar investment in the UBS by the Singapore Investment Corporation, a 7.5-billion-dollar investment in Citigroup by the Abu Dhai Authority, a stake of up to 5 billion dollars in Merrill Lynch by Singapore's Temasek and a stake of 5 billion dollars in Morgan Stanley by the newly-founded China Investment Corporation.

 

Hailing the SWFs as the savior of the financial world, investment bankers have hoped these funds, with permanent capital and deep pockets, will step up to fill the gap in the merger and acquisition activities created by the slowdown in the private equity industry.

 

Biased by protectionism in some countries

 

However, the SWFs' development has been biased by investment protectionism and finance protectionism of various kinds in some countries.

 

China, who set up its first SWF in late September last year, has called for a fair and objective perspective on the SWFs.

 

The SWFs, as they also are market-oriented, should enjoy the same treatment as the other institutional investors, said Wei Benzhong, deputy director of the State Administration of Foreign Exchange of China, while addressing an economic forum in late December last year.

 

The Chinese official also said neither such funds from the developing countries nor from the developed countries should be discriminated against in the market.

 

They should get equal treatment, competing on an even playground. The developed countries and the developing countries should open their markets under the principle of equality and reciprocation to create a win-win situation.

 

Financial Times' Wolf also rebutted those who regard the SWFs as a threat instead of an investor, saying many SWFs should raise no concerns.

 

"My broad recommendation, then, is to consider the emergence of these funds as part of the integration of countries that accept a bigger role of the state in markets than Western countries do today," Wolf said.

 

"It is absurd to take a country's exports of oil and refuse to allow it to buy assets in return," he added.

 

(Xinhua News Agency January 13, 2008)