What Is a Sovereign Wealth Fund?

Sovereign Wealth Funds, corresponding to private wealth, refer to the accumulation and control of a country's government through specific tax and budget allocations, renewable natural resource income, and balance of payments surpluses. They are generally controlled and controlled by the government. Public wealth held in foreign currency.

Sovereign wealth fund

According to statistics from the London International Financial Services Authority (IFSL) in March 2009, global sovereign wealth funds managed assets of US $ 3.9 trillion in 2008, an increase of 18% over 2007. Among them, Middle East oil-producing countries have global sovereign wealth
The management model of sovereign wealth funds is divided into two stages:
Phase 1: Direct management by the central bank
Because the national foreign exchange surplus and fiscal surplus are slightly surplus after meeting the necessary liquidity, the central bank is generally responsible for managing foreign exchange reserves and fiscal reserves. The central bank divides it into different assets based on its policy objectives, the risk characteristics and duration of its reserve assets, and the investment instruments available in the market.
Organizational structure and internal corporate governance
The organizational structures of sovereign wealth funds in different countries are similar, and they are divided into the following three levels:
Level 1: Government authorities
In some small countries, the president and king are generally responsible for the management of sovereign wealth institutions, while other countries use the central bank or the Ministry of Finance as the competent authority according to the nature of the sovereign wealth fund. The functions performed by government authorities generally include: nominating and appointing board members and chairman of sovereign wealth institutions; deciding whether to increase or decrease foreign exchange surplus and fiscal surplus to sovereign wealth funds; reviewing financial reports of sovereign wealth funds. Government authorities generally do not interfere in the daily operations of sovereign wealth funds.
Level 2: Sovereign Wealth Fund
Most sovereign wealth funds have been established and improved according to law
Regardless of the initial motivation for the establishment of a sovereign wealth fund, the basic goal of sovereign wealth fund management is to obtain a high return on investment to ensure the stability of the country's surplus wealth purchasing power, which is in contrast to the liquidity and security of traditional foreign exchange reserve management. The goals are quite different.
The active management of sovereign wealth funds mainly considers the long-term investment value of assets, and does not pay too much attention to short-term fluctuations.
According to data released by the US Sovereign Wealth Fund Institute in December 2015, the world ranks as
Country
Fund Name
Assets $ Billion
Inception
Origin
Linaburg-Maduell Transparency Index
Norway
Government Pension Fund-Global
$ 824.9
1990
Oil
10
UAE Abu Dhabi Abu Dhabi Investment Authority $ 773 1976 Oil 6
China
The sources of funding for sovereign wealth funds include four categories:
1. Surplus of foreign exchange reserves, mainly in Asia, Singapore, Malaysia, South Korea, Taiwan, Hong Kong and other five major countries and regions (see the list of foreign exchange reserves of each country);
2. Foreign exchange surplus of natural resource exports, including foreign trade surplus of natural resources such as oil, natural gas, copper and diamonds, mainly represented by countries in the Middle East and Latin America;
3. Rely on the International Aid Fund, represented by Uganda's Poverty Aid Fund.
4. Issuing special government bonds, with China as the representative
Since the second half of 2007, the lives of international investment banks have not been very good. They have been in the United States.
Since it may be inconvenient to personally operate the knife, it should be a good idea to lend someone else's hands. Throughout 2007, US dignitaries have expressed on many occasions either explicitly or implicitly that the IMF should come forward as soon as possible to start the work process of assessing the risk of SWFs. , A global operating and regulatory rule for SWFs. The wishful thinking of the United States is that under the international supervision framework of the IMF, SWFs are bound no matter where they go, it is better to stay in the United States. When the EU's appeal was flat, Germany also thought of the difficult work being promoted by the IMF.
The invitation from the United States and Germany is actually in the heart of the IMF. One of the most important functions of the IMF is to act as the international lender of last resort to provide financing to crisis countries when the financial crisis breaks out. In the past 10 years, with the rapid growth of foreign exchange reserves in emerging market countries and regions and their conversion into SWFs, the importance of acting as the international lender of last resort has decreased significantly. Therefore, the IMF has also proposed plans to lay off up to 15% of its staff. If the IMF does not change the focus of its work and strengthen the monitoring of SWFs, once its scale grows sharply and becomes larger, it will marginalize the status of the IMF. Of course, the IMF is also aware of what it means to gradually weaken the financing function. Therefore, strengthening the international supervision function is one of the contents of the IMF reform. Under such circumstances, when the United States, Germany and other countries called on the IMF to formulate relevant principles to strengthen the supervision of SWFs, the IMF believed that this was a time to reshape the international oversight function and naturally agreed. What's more, the IMF is empowered to assess and maintain globally
At 10:00 on September 29, 2007,
Sovereign wealth funds are often compared with official foreign exchange reserves , causing a lot of confusion. The common ground between the two is obvious, that is, both are owned by the state, and both belong to the broad state sovereign wealth, and their sources are quite similar. But we can distinguish them in several ways:
First, official foreign exchange reserves are reflected in the balance sheet of the central bank, which has an independent balance sheet and corresponding other financial statements outside the central bank's balance sheet.
Second, the operation and changes of official foreign exchange reserve assets are closely related to a country's balance of payments and exchange rate policies, while sovereign wealth funds generally have no necessary and direct connection with a country's balance of payments and exchange rate policies.
Third, changes in official foreign exchange reserve assets have monetary policy effects, that is, other conditions remain unchanged. An increase or decrease in the central bank's foreign exchange reserve assets will cause a country's money supply to increase or decrease through changes in the currency base. Changes in sovereign wealth funds usually have no monetary effect.
Finally, central banks of various countries usually adopt a conservative and cautious attitude in the management of foreign exchange reserves, pursuing maximum liquidity and maximum security, while sovereign wealth funds usually implement active management, which can sacrifice certain liquidity and bear greater investment risks in order to achieve The goal of maximizing return on investment.
Because of these differences, in recent years, an international trend has been to separate the excess of official foreign exchange reserves (that is, the excess foreign exchange reserve assets that are sufficient to meet international liquidity and ability to pay) from the balance sheet of the central bank and establish a special Government investment institutions, that is, sovereign wealth funds, or other third-party investment institutions are entrusted with professional management to "decouple" them from exchange rates or monetary policies, and only pursue the highest return on investment. The Singapore Government Investment Corporation (GIC) is the pioneer of this model. The China Investment Corporation was established in 2007 with a registered capital of 200 billion US dollars, which is the latest and most important case of this model.

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