A new force in global finance

This week’s Fund Strategy included the following comment by me on sovereign wealth funds.

Beijing’s recent purchase of a $3bn (£1.5bn) stake in Blackstone, an American private equity group, raises fundamental questions about global finance.

For a start, it signals that China is starting to diversify the holdings in its $1,200bn of foreign exchange reserves. Rather than holding American treasury bonds, it is shifting its portfolio towards other types of assets. Private equity is only one of several asset classes the Chinese are moving into.

More generally, the Blackstone move signals the growing importance of sovereign wealth funds (SWFs). An increasing number of countries are developing substantial SWFs as an endowment for the future.

According to Morgan Stanley estimates quoted in the Financial Times, $2,500bn is invested in SWFs and the amount is growing fast. In comparison, about $1,500bn-$2,000bn in hedge funds and $55,000bn is invested in conventional assets worldwide.

It should be recognised that some amounts overlap. For example, SWFs no doubt invest in both hedge funds and conventional funds. But whatever the exact asset allocation of SWFs, the volume of assets they control is huge and their influence looks set to increase. The average unit trust investor will have their funds affected by the behaviour of SWFs as well, even if they are unaware of their influence.

The secrecy of SWFs means it is hard to work out exactly what effect they are having. It is likely that bond yields are being depressed by SWF purchases, but it is hard to prove. It is also probable that other asset classes, such as shares or private equity, will rise in price as more assets are allocated to them.

The rise of SWFs is another indication of how the rapidly growing developing countries, China in particular, are changing the world. Relatively few people in the West appreciate the scale of this change. But those who work in the financial markets have increasing evidence in front of them.