Sovereign Wealth Funds (SWFs) are in the news for the past two years, essentially because of their gradually rising volumes, their investments in many financial instruments across the globe and the possible political implications.
The SWFs now account for over $3.5 tn, generated by over 35 nations. They are perceived as alternative investment vehicles, that partly answer the problem of global imbalances: Many Asian and Gulf nations generate bilateral trade surpluses against the US, which is the biggest importer nation. These trade surpluses, ideally, can be domestically invested to spur growth.
However, for various reasons, the domestic investment demand does not match the surpluses over a period of time and hence, the generation of forex reserves. These forex reserves are invested by various central banks in risk-free financial instruments, thus displaying a conservative approach. Nations like China, Japan, India, Singapore, Hong Kong, Malaysia and Russia apart from oil exporting gulf nations have very substantial forex reserves, invested in risk-free treasuries of the US, in particular, eventhough there are now attempts to diversify these treasury investments into other developed nations, denominated in euro, pound sterling, Japanese yen, etc. Thanks to these huge treasury investments, and also partly in the form corporate investments in the US, the super power is able to garner huge funds at low interest rates. |
