Question

Find 2 examples of US corporations partially owned by China's SWFs. Find one recent news article (2019-2020) related to Chinese SWFs in the US. From the point of view of US firms and their shareholders, what are the pros and cons of these investments? 20 lines min.

Answer 1

A sovereign wealth fund (SWF) is a state-owned investment fund or entity which comprises of pools of money derived from a country's reserves. Reserves are funds set aside for investment to benefit the country's economy and its citizens. The funding for an SWF comes from central bank reserves which accumulate because of budget and trade surpluses, official foreign currency operations, money from privatizations, governmental transfer payments and revenue generated from the exporting of natural resources.

• A sovereign wealth fund is a state-owned investment fund that is used to benefit the country's economy and citizens.
• Funding comes from central bank reserves, currency operations, privatizations, transfer payments, and revenue from exporting natural resources.
• Funds tend to prefer returns over liquidity and are therefore more risk-tolerant than traditional foreign exchange reserves.
• Acceptable investments in each SWF vary from country to country.

the traditional classification of sovereign wealth fund includes

• Stabilization funds
• Savings or future generations funds
• Pension reserve funds
• Reserve investment funds
• Strategic Development Sovereign Wealth Funds (SDSWF)

The acceptable investments included in each SWF vary from country to country. Countries with liquidity concerns limit investments to only very liquid public debt instruments. In some cases, sovereign wealth funds will invest directly in domestic industries.

The China Investment Corporation is an SWF that manages and invests portions of foreign exchange reserves of the People’s Republic of China. While the exact number of assets currently under management isn’t specified, the estimated value puts the total somewhere near $1 trillionUSD. Recently, the fund secured a 45% stake in a $2 billion property in NYC on the Avenue of the Americas. The fund’s also been working on a possible deal to purchase a European warehouse company – Logicor – from The Blackstone Group.

Overseen by a board of directors and supervisors, as well as an executive committee, this sovereign wealth fund also employs an outside advisory council comprised of specialists in a number of different countries that include Canada, the United States, South Africa, Brazil, Norway, France, and Australia.

The upcoming SWF is US - China engagement in Space.

Pros:

• if the country relys on natural resources, when those resources are gone you can supplement the income.
• It can be used to implement stimulus in recessions vs changing taxes/spending.
• Build income for the country other than taxes.

Among the positive aspects of these funds is that they operate by diversifying the government's investment assets in different instruments, countries and currencies, thereby reducing risk and increasing profitability.

The SWF provides a safety net for a country in the light of the difficulty in predicting future fluctuations, the requirements for economic development in addition to rising Saudi population growth rates. Moreover, it has the ability to offer as well as attract talents and technical expertise in the investment fields.

Con’s:

• There is no guarantee of a positive return, you could lose it all
• It effects foreign exchange rates
• It’s either removing money from the economy, or adding to it. If you increase taxes to pay for a wealth fund, your actually removing money from where it would be spent and spending it somewhere else lowing an asset bubble or your blowing an asset bubble through sheer money printing.
• At the international level, these funds provide a source of liquidity and assurance of stability in the global financial markets. The sovereign wealth funds could also be an integral part of the global market, and work towards improving the liquidity in the market, especially in that they do not operate like the other forms of short-term financings. The industrialized countries are concerned that these funds would turn into pressure groups in their financial markets and undermine the balance in the global stock markets.