The scale and impacts of investments by Sovereign Wealth Funds (SWFs), State-Owned Enterprises (SOEs) and other forms of State Capital Pools (SCPs) are increasingly rapidly and are significantly affecting the dynamics of financial markets across the world. The largest global investment banks target these huge sources of liquidity as key clients and are growing dedicated global teams to service their needs and increase their market share in their investment activities.

There are methodological difficulties in quantifying specific totals of state investment capital, especially regarding SOEs and other more opaque SCPs, but there are numerous data sources for SWFs.  For example, in 2008 the IMF estimated the total assets of SWFs to be between US$ 2-3 trillion and projected that they would be between US$6-10 trillion by 2013.  However, the ongoing repercussions of the Global Financial Crisis (GFC) have obviously slowed that particular trend curve in recent times.  Deutsche Bank in 2009 estimated global GDP at US$61 trillion and SWFs at US$3 trillion or 5% of that total.  The Economist (2011) used IMF data to estimate global GDP in 2011 to be $65,000 billion.  In March 2012 the Sovereign Wealth Fund Institute (SWFI) estimates that the cumulative total of assets under management held by SWFs world-wide is $4,955 billion, equivalent to 7.5% of estimated global GDP. 

As the GFC has demonstrated so dramatically valuations can change and one cannot be totally certain about this data.  However, it is highly likely that the assets under management held by SWFs have doubled in only three years and certainly seems to be increasing at a much more rapid rate than the overall global economy as SWFs become a very significant actor on the global financial stage. 

Part 1 of my opinion pieces on SWFs and other forms of state capital, (published on the CLMR portal on 20/3/12) provided numerous examples of the diverse range of jurisdictions that operate SWFs.  The next obvious question to ask is who has the largest SWFs and therefore is presumably wielding the most influence in terms of inputting liquidity into global financial markets from the ranks of the SWF cohort? 

As at 31 December 2011 Australia’s own Future Fund had assets under management of $73.07 billion.  That total ranks the Future Fund as the 13^th largest SWF according to the latest rankings of the SWFI.  The Abu Dhabi Investment Authority tops the SWFI rankings with $627 billion, followed by Norway’s Government Pension Fund – Global with $611 billion.  Interestingly China has four of the top eleven in the SWFI rankings: No. 3 – SAFE Investment Company at $567.9 billion; No. 5 – China Investment Corporation - $439.6 billion; No. 7 Hong Kong Monetary Authority - $293.3 billion; and No. 11 National Social Security Fund - $134.5 billion.  Singapore has the Government of Singapore Investment Corporation (GIC) at No. 8 - $247.5 billion and Temasek Holdings at No. 9 - $157.2 billion in the SWFI rankings.

The importance of these totals is heightened by the sheer pace of economic expansion by some of those jurisdictions that have a significant emphasis on state-driven investment capital.  For example, utilising data from the IMF, OECD and World Bank, Jorgenesen and Khuong (2011) project that if current growth trends are maintained, then by 2020 China will have replaced the US as the world’s largest economy with 20.08% of global GDP (up from 13.92% in 2010).  In the same period the US share of global GDP is expected to fall from 20.14% to 17.44%.  Similarly, the G7 (Canada, France, Germany, Italy, Japan, UK & US) share of global GDP is expected to fall from 40.62% in 2010 to 33.30% in 2020 and the Asia 7 (China, Hong Kong, India, Indonesia, Singapore, South Korea & Taiwan) share to rise from 25.16% in 2010 to 33.18% in 2020.

So, it should be clear that the strategic importance of state capitalism in financial markets is growing and its various forms are increasingly important sources of liquidity in currently volatile global financial markets.  However, the ramifications of these liquidity sources are not limited to financial arenas.  Also there are ongoing repercussions in global political, diplomatic and military spheres due to their increased interdependence under conditions of globalisation as the global economy re-calibrates.  The Asia 7 is destined to play an increased global strategic role that reflects their growing economic influence.  Of particular importance for Australia is the fact that its most important trading partner China is rapidly expanding its portfolio of overseas investments, with a particular focus on financial services and the resources sector.  China’s need for resource commodities to drive its industrial expansion is pivotal to the management and policy development of the Australian economy.  Given this economic and political reality that Australia’s future economic well-being is increasingly intertwined with the Asia 7, especially China, the issue of better understanding global state investment capital should be a strategic priority in Australia.

For more detailed analysis of SWFs and their role in financial markets see: George Gilligan, Multi-lateral governance of financial markets – the case of sovereign wealth funds, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1866038