Sovereign Wealth Funds: When Governments Become Players


This is the VOA Special English Economics Report.

Last month, America's biggest bank, Citigroup, agreed to sell five percent of its shares to the government of Abu Dhabi. The deal, worth seven and a half billion dollars, was another example of growing investments by sovereign wealth funds.

These are owned by governments. They are separate from the holdings of central banks. Sovereign wealth funds are estimated to hold more than two trillion dollars.

The largest is the Abu Dhabi Investment Authority, established in nineteen seventy-six. The emirate does not say how much its fund is worth. Estimates are between five hundred billion and nine hundred billion dollars.

Most sovereign wealth funds are tied to money from oil exports. Oil prices reached a record high near one hundred dollars a barrel in November. Oil is traded in dollars. And dollars have been flowing into Gulf economies like Abu Dhabi.

But there is a limit to how much money can be pumped into an economy without causing inflation to jump.

Brad Setser is a fellow for geoeconomics at the Council on Foreign Relations in New York. He notes that one problem facing these oil exporters is that their currency values are linked to the dollar, and the dollar has fallen.

Oil exporters can use sovereign wealth funds to build up reserves of money to protect against a drop in oil prices. But a severe drop seems unlikely. So instead they are making foreign investments that they hope will pay good returns.

Sovereign funds are known for highly conservative investments. But now some appear willing to take more risk.

Not all funds involve oil money. A good example is the China Investment Corporation. This newly formed company is financed by selling government bonds and buying foreign exchange from the Chinese central bank.

Much of the money in the China Investment Corporation is meant to provide capital for state-owned Chinese banks. The fund will also support the international expansion of state-owned Chinese companies. The fund is expected to reach a value of about two hundred billion dollars.

Back to Abu Dhabi: Ministers from the Organization of the Petroleum Exporting Countries met there on Wednesday. They decided to leave OPEC production unchanged for now, but agreed to meet again February first. They also welcomed their thirteenth member, Ecuador, which rejoined OPEC in November.

And that's the VOA Special English Economics Report, written by Mario Ritter. I'm Steve Ember.