- NBR - The National Bureau of Asian Research

Introduction (Understanding China's New Sovereign Wealth Fund)

Eric G. Altbach

The explosive growth of sovereign wealth funds (SWF)—together with the increase in resources available to other government-linked investors such as central banks, public pension funds, and state-owned enterprises in recent years—has spurred intense discussions about the implications for the international financial system. The debate over SWF investments in particular has likely been fueled, at least in part, by a growing anxiety over globalization even in many of the most developed economies, including the United States and Europe. An ongoing reassessment of the costs and benefits of investment liberalization—which parallels a similar debate over trade—has led to a variety of new policy proposals for more rigorous investment screening and review procedures and for legal mechanisms to block foreign investment. Some observers have argued that many of these policies, if implemented, would have the effect of raising new barriers to cross-border investment flows.

As has been the case in debates over the benefits of trade in many countries, China has been a central focus of attention and concern. The activities and plans of the newly established Chinese sovereign wealth fund, China Investment Corporation (CIC), have received heavy publicity and growing scrutiny. This is a major concern for China, as the country is now generating the world’s largest current account surplus and must seek international investment opportunities to recycle this surplus productively. The United States too has a critical stake in managing this issue properly. U.S. multinational firms depend on the open investment environment overseas that the U.S. government has done so much to promote. Beyond this interest in maintaining investment opportunities for U.S. firms abroad, the United States now runs the world’s largest current account deficit, which reached nearly $740 billion in 2007. To fund this deficit, the country must attract foreign capital at the rate of more than $2 billion per day or risk a number of painful economic consequences.

The Context for the Current Debate over SWFs

The sudden furor over SWFs has struck some experts as odd, as the funds have been in existence since the 1950s, particularly in the Middle East. It is clear, however, that SWFs are now in a period of dramatic growth. While estimates vary, SWFs currently account for 1–2% of global financial assets, and may be growing by as much as $1 trillion per year. If this rate of increase continues, SWFs may account for 4% of global wealth...

[Free preview ends here.]