Who is afraid of public investment funds

Until 2015 the volume of government investment fund could reach an amount of 12 000 billion US-Dollar. This forecasted development will certainly have a strong impact on the financial market landscape.

China has recently caused a stir in the financial press by annoucing its decision to create a special fund for investing its gigantic foreign exchange reserves. With $1200 bln China currently holds the world's largest foreign exchange reserves. This would be a significant change of direction, since China would no longer invest solely in US-government bonds, but also channel funds into stock markets and participate in direct investments. As a first step China announced on 21st May that it would invest $3 bln of its reserves in Blackstone, a New York-based private-equity firm soon to issue shares.

China's new public investment fund (in market language: Sovereign Wealth Fund; short SWF) is said to comprise $300 bln and has the capacity to acquire practically every company on the globe. It is only natural - against this background - that some critics wonder if China would also be driven by political motives. A few months ago Singapore's SWF Temasek was believed to have contributed to the fall of Thailand's prime minister Thaksin Shinawatra by investing in Thailand's telecom provider Shin.

Stephen Jen, analyst at Morgan Stanley, believes that SWFs would enable countries to acquire know-how by making bids on foreign firms. "High-tech firms and foreign banks" could be the primary targets of these funds, wrote Stephen Jen beginning of May. China is aware of these views and has already announced to waver its voting rights at Blackstone.

SWFs are continously gaining importance. Currently, the 25 countries which hold such a fund, have around $2500 bln assets under management. This almost equals to 50 percent of the worldwide foreign exchange reserves and is twice as much as the entire assets managed by the hedge fund branch. Here is certainly enough power to influence stock prices. Although nobody seems to know the exact investment details of the secretive funds, George Magnus, chef economist at UBS, is convinced that SWFs of oil-producing states were able to push up stock quotations in Malaysia, Indonesia or China as they are the biggest investors in these countries.

Incidentally, oil-exporting states were equally the first to create such funds. The Adia fund of the United Arab Emirates can already look back to a 30-year history. According to estimates of Morgan Stanley the latter fund is believed to be the worldwide largest with $875 bln assets. Russia, which until recently had invested its oil revenues primarily into the money market, recently announced that it would split its SWFs to enhance revenue.

But the biggest growth will certainly come from Asian countries in the years to come. Apart from China's SWF (of $300 bln), Korea wants to double the volume of its fund, whereas Taiwan and Japan are considering similar steps. Stephen Jen estimates that all SWFs would collectively grow at the rate of $500 bln per year to finally reach a total volume of $12 000 bln in the year 2015. This sum becomes even more gigantic when compared to the current global stock market capitalisation of $ 50 000 bln. George Magnus said: "The growth of public investment funds in the years to come is one of the most dramatic developments for the financial markets."

Source: NZZ am Sonntag





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