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The Sovereign Wealth Fund was
conceived by a person named Andrew Rozanov (August 2005, p.6). Sovereign Wealth
Funds (SWFs) are not only diversified but also have a long history. The
diversification of SWFs is reflected in geography, capital source, size, age
and investment strategies. The first SWF was established
in 1953 called Kuwait Investment Authority and the first industry association
was founded in 2007, which is International Working Group (IWG) (Aldo & Emil, 2011,
p.6). That is to say, IWG is quite important for SWFs. According to Aldo
& Emil (2011), they argued that the definition of SWFs includes Government
Pension Fund of Norway, the Chinese Investment Corporation and Kiribati’s
Revenue Equalization Reserve Fund. In the view of Ian Bremmer (2010, p.7), he defined SWFs as “state-managed pools of excess
cash that can be invested strategically”. At the same time, there
is also an understanding of SWFs
in the Santiago Principles. SWFs are accumulated through the
distribution of specific taxes and budget allocation, the balance of payments surpluses,
etc. (Santiago
Principles, 2011, p.21). In
another aspect, ownership, investments and purpose and objectives
constitute three critical factors for SWFs (Santiago Principles, 2011, p.21).
Ownership is reflected in SWFs
government control and allocation. The key investment strategy of
SWFs is that
they are owned by a number of sovereign governments for long-term foreign
financial investment. Thus, the purpose and objective of SWFs are to use
the government’s funds to achieve the original financial goals and reduce the
debt, and to undertake certain investment risks.

 According to
investment and capital (Aldo
& Emil, 2011, p.8), SWFs can be divided into four categories: saving and
pension reserve funds, stabilization funds, economic development funds and
reserve investment corporations. Saving and pension reserve funds were set up
to better preserve capital for future generations. The scale of these funds is usually
large and old and are mainly concentrated in the developed market. Besides, the
risk of inflation can easily affect saving and pension reserve funds, so it is
the key to maintain and increase the value. Stabilization funds found in the
last 20 years and these funds are established by the government and central
bank in order to effectively reduce the impact of commodity price fluctuations
or inflation. That is, the main purpose of stabilization funds is to stabilize
the countries’ fiscal expenditure, especially in the period of the recession. Economic
development funds are to promote economic diversification under the condition
of abundant national resources. Direct investment has become the first choice
for these funds, but still some of them focus on the domestic economy (Aldo & Emil, 2011,
p.9). Reserve investment corporations are to reduce the
flow of foreign currencies, and better to manage the risk of currencies and use
the risky investment to achieve high returns. For example, Chinese Investment
Corporation is ones of the largest sovereign wealth funds in the world.

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There is nothing to be afraid of SWFs because they are
growing and strengthening. SWFs have the financial strength of a large pension
fund, which is reflected in the flexibility of venture capital. In addition,
SWF industry is more concentrated than other industries of the same kind. Through
the large number of foreign exchange funds that some central banks have to
support SWFs assets, which can be developed organically through the current
investments’ appreciation (Aldo
& Emil, 2011, p.9). There are also some benefits that can be shown not
to be afraid of SWFs. Firstly, SWFs not only bring benefits to their own
countries but also enhance their competitiveness of natural resources and
exports in the world, so as to get rid of the single national economy. SWFs transfer
some consumable natural assets into some permanent income financial assets
through the liquidity of the resource exportation (Aldo & Emil, 2011, p.9).
Secondly, stabilization funds help to prevent domestic monetary losses from
domestic shocks, thereby promoting the growth of the financial economy and
strengthening national security against foreign attacks. Thirdly, large institutional
investors reflected by SWFs can help improve the return of the capital market,
while reducing transaction costs make large investors can also benefit from it,
have more investment opportunities, and help reduce risk (Aldo & Emil, 2011, p.10).
SWFs can stabilize the impact of the financial crisis on the market and keep
investment in a period of undervaluation. Furthermore, SWFs have played an
important role in the survival of many financial systems in the financial
crisis. Finally, the removal of capital restrictions can bring some benefits. Funds
owned by SWFs are conducive to large-scale, high-risk investment, and their available
capital which is much more than the source of the traditional emerging markets
(Aldo &
Emil, 2011, p.11). In a world, SWFs benefits outweigh the
disadvantages, so do not have to be afraid of them.

SWFs need to be regulated due to the emergence of some
problems. The most common criticism of SWFs is their poor management or poor
allocation of capital. This problem is the one that needs to be corrected the
most. The key to solving this problem is to adjust. In other words, not only
the supervision of the regulator, but also the internal needs to be
strengthened. This can reduce the damage caused by the financial crisis and
minimize its losses. SWFs are in charge of financial bubbles. If there is no
regulation, the financial bubbles are breaking out quickly and they have a wide
range of impact. The emergence of financial bubbles can cause a stock market
crash, a large number of debt crises and harm the global financial system to
make its stable system damaged. In order to avoid this kind of harm, financial
institutions should better control investment, not excessive investment and
pursuit of economic growth blindly. The system of financial institutions would
be threatened without regulation. Private financial companies have to deal with
regulations that can not only limit their size but also control their exposures
to risky assets (Aldo
& Emil, 2011, p.12). When debt financing occurs, the introduction of market
discipline can better improve and govern companies and consolidate risk
management. Political incentives can cause confusion in some financial institutions
or damage to reputation. The government should strengthen the political risk of
overseas investing and make clear the moral standards of some investments to
make the financial system more perfect. The political motives of SWFs have been
blamed for the lack of transparency and SWFs’ investments may affect the
market. For countries with SWFs, profits and international capital flows can
bring adverse changes. OCED and IMF should work together with SWFs to establish
a set of governance and transparency guidelines for the fund, so that SWFs can
operate and regulate better and improve the ability of risk management. The
financial protectionism can put SWFs at risk. That is to say, SWFs are
controlled by the government, and threaten their own economic security if they
do not comply with market rules. The government should curb the financial
protectionism effectively and better regulate SWFs.

General speaking, SWFs are the controversial issue.
The supervision of SWFs should let the state make their decisions and rely on
bilateral agreements or it can create a
cross-border investment regulatory agency. The World Trade Organization would
be a good example (Aldo & Emil, 2011, p.14).
I learned that SWFs
as the most important institutional investors in the world, have made important
contributions to global economic security and financial stability. Secondly, in
the period of the financial crisis, the SWFs helped to reduce the risk of
financial institutions and maintain the stability of the global financial
market. Finally, the SWFs will become an important source of capital in the
financial market and will promote the growth of all kinds of asset
transactions, accelerate and adjust the global asset allocation pattern, and
slow down the price fluctuation of the market. 

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