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Economic SYNOPSES
short essays and reports on the economic issues of the day
2008 ■ Number 11

The Sovereign Wealth Funds of Nations
Christopher J. Neely

S

current budget surpluses for expected liabilities in health care
overeign wealth funds (SWFs) are commonly defined as
and pensions.
investment vehicles created by government entities to invest
From a consumption-smoothing perspective, the rationale
in income-producing assets. According to the International
for the Chinese SWF (China Investment Corporation or CIC) is
Monetary Fund (IMF), governments use SWFs to (i) stabilize
opaque. China is still a relatively poor but rapidly growing country,
revenues from commodity exports; (ii) invest foreign exchange
with a large SWF. Essentially, China saves today (reduces conreserves; (iii) fund pension liabilities and development projects;
sumption) to consume even more in the future, when China will
and (iv) save proceeds from the sale of nonrenewable resources
be richer. This is puzzling behavior.
(e.g., oil) for future generations. (This last objective is the most
From a mechanical point of view, China’s foreign exchange
common.)
intervention strategy produced the CIC’s assets as a byproduct.
SWFs have been around for many years: For example, the
To restrain the rise of their currency’s value, the Chinese State
Kuwait Investment Office—which manages funds for the Kuwait
Administration for Foreign Exchange has long purchased foreign
Investment Authority—was created in 1953. However, the recent
currency (by selling their own). Ordinarily, this intervention would
growth in their assets and numbers—and especially their large
raise the Chinese money supply, producing domestic inflation,
investments in companies such as Citigroup, Merrill Lynch, and
but the People’s Bank of China issues securities (bills) to soak up
Union Bank of Switzerland—has attracted much new attention.
the excess liquidity created by this foreign exchange intervention.
The IMF estimates that SWFs now control $2 to $3 trillion in
The ultimate outcome is that the Chinese government exchanges
investments and could have $6 to $10 trillion by 2013. In compariits own bonds for foreign assets.
son, in 2006, the market capitalization of all the equity markets
But this mechanical explanation fails to answer the question
in the world was about $50 trillion and world GDP was about
why China accumulates foreign assets, rather than consuming
$48 trillion. Both the recent hikes in oil prices and the tendency
more or even investing more in domestic physical assets? One
of nations to accumulate foreign exchange reserves have conmight conjecture that China’s high savings rate reflects what
tributed to the growth of SWF assets.
economists call “precautionary saving”—saving against a downWhat is the economic logic of SWFs? SWFs permit nations
turn—which in turn reflects its relatively recent experience with
with temporarily high incomes from nonrenewable resources—
poverty. Nevertheless, it seems likely that China will not accusuch as oil exports—to save for the future. That people prefer
mulate assets at its present pace forever. ■
relatively smooth levels of consumption—rather than starving
one year and gorging the next—
is a cornerstone of economic
theory. SWFs enable governTop Ten Sovereign Wealth Funds
ments to save high current
Range of asset
holdings ($ billions)
income for future spending
when income may be lower.
Country
SWF
Lower
Upper
Year of inception
The chart shows that six of
UAE
Abu Dhabi Investment Authority
250
875
1976
the top ten SWFs, measured by
Norway
Government Pension Fund–Global
380
380
1990
asset holdings, come from oilSingapore
Government Investment Corporation
100
330
1981
exporting nations: United Arab
Saudi Arabia
No designated name
289
289
No formal start date
Kuwait
Reserve Fund for Future Generations
213
213
1976
Emirates, Norway, Saudi Arabia,
China
China Investment Corporation
200
200
2007
Kuwait, Russia, and Libya. SWFs
Russia
Reserve Fund
125
125
2004
will enable these countries to
Singapore
Temasek Holdings
108
108
1974
maintain their consumption levels
Australia
Australian Future Fund
54
54
2004
after the depletion of their oil, just
Libya
Libyan Investment Corporation
50
50
2006
as 401Ks allow people to save for
SOURCE: Monetary and Capital Markets and Policy Development and Review departments of the IMF, “Sovereign
consumption during their retireWealth Funds—A Work Agenda,” February 29, 2008; http://www.imf.org/external/np/pp/eng/2008/022908.pdf.
ment. Likewise, the Australia
Futures Fund is intended to save
Views expressed do not necessarily reflect official positions of the Federal Reserve System.

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