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Governments on a Shopping Spree: the Emergence of Sovereign Wealth Funds

The corporatization of government continues with the rise of what's called a sovereign wealth fund. Put briefly: governments have got money, and they're playing the market.

Ever since gold was tossed out as the international standard of value and exchange, countries have held large amounts of foreign currency, called foreign exchange reserves. For instance, as for US dollars, China holds $1.3 billion, Japan $924 million, and Europe $439 million. Only today, instead of sitting on that cash, countries are throwing that money into international investments.

The Economist, in a piece called 'Governments Go Shopping' put it this way:

Go for a walk in Chelsea, an expensive bit of London, and you may stroll by the Coldstream Guards' barracks, now the property of the government of Qatar; a branch of the venerable Barclays bank, soon to be part-owned by the People's Republic of China; and then buy a picnic at Sainsbury's, Britain's oldest supermarket, which the Anglophile Qataris are trying to buy too. What goes for Chelsea may soon be true for neighbourhoods in open economies all over the world: governments are on a shopping spree.

Earlier this summer, US officials started to grumble. Their worry is that these are immense amounts of money (sovereign wealth funds are expected to be worth $12 trillion by 2015) subject to little oversight or scrutiny. The fear of hedge funds has always been that they are too hidden. Sovereign wealth funds are much more shrouded.

A complete portrait has hardly been painted, made clear by a report from the US Treasury that states, "Because relatively little is known about most SWFs, market estimates of their size vary widely."

Emerging markets, in their rise to power, have amassed big foreign exchange reserves. They're ready to play, only, as China recently bought into the massive global bank Barclays, one has to ask: strategically, what kind of new leverage do sovereign wealth funds offer to a new crop of states playing on the global economic stage?