A new financial player has emerged on the international finance scene. Known as Sovereign Wealth Funds (SWFs), these state-controlled investment vehicles, fueled largely by record oil profits, are having a big impact on the U.S. economy and beyond. To help our nation respond to these new actors in international finance, I have established a bipartisan Task Force on Sovereign Wealth Funds with Rep. Tom Davis (R-VA) to explore these issues.
The U.S. has been relying on foreign governments to purchase our Treasury bills in order to finance our national debt. But as the dollar has rapidly declined in global markets, these nations are increasingly turning away from purchasing our debt and instead using their SWFs to invest in other projects. These funds are already busy buying up equity stakes in some of the world’s biggest companies, including recent purchases such as Dubai’s $7.5 billion stake in Citigroup, Saudi Arabia’s $6 billion purchase of a stake in HSBC Holdings, and China’s $9.4 billion slice of Morgan Stanley.
Already valued at $2.2 trillion, SWFs could reach $13.4 trillion in a decade—or nearly the size of the entire New York Stock Exchange. Seven SWFs currently have over $100 billion in assets, including those based in Abu Dhabi, Singapore, Norway, Kuwait, China, and Russia. It is expected that Bolivia, Japan, and Russia will establish funds over the next year.
Many SWFs lack transparency, making it difficult to determine how much money is involved, whose money it is and how these massive funds are being used. As these funds begin to invest in non-Treasury U.S. assets like Citigroup, significant concerns are raised.
The largest SWFs, like China, hold their funds in dollars. The non-partisan Congressional Research Service tells us that if SWF countries were to rebalance their portfolios all at once – moving from dollars to some other currency — they would sell off $526 billion in dollars. That’s a massive flow, enough to destabilize our economy. With the U.S. boasting some of the most dynamic growth opportunities in the world, it is important that we understand and be on the leading edge of this profound financial, global transformation. Given the growing leverage these funds have over our economy, it is imperative we begin focusing on this issue immediately in a bipartisan fashion.
There are a number of questions the new, bipartisan Task Force on SWFs will seek to address. These include: How much transparency should be required of these funds? How much reciprocity should there be in terms of bilateral investment? What is the appropriate level of government control of SWF operations, given the possibility that some SWF investment decisions may be based on non-commercial, geo-political decisions? And how concerned should we be if China and OPEC nations were to stop purchasing U.S. Treasury Bills?
SWFs can be constructive, responsible and even essential participants in the international financial system. Our economy can benefit from openness to SWF investment flows. But to fully realize their potential, a better understanding of these new investment vehicles must be reached among policymakers and the public at large.