Sovereign wealth : the role of state capital in the new financial order

As the first major collection of papers on sovereign wealth funds and state-owned enterprises, this book provides an essential guide to the geo-political impact of these pools of capital on global markets. The rise of sovereign wealth funds and state-owned enterprises represents a fundamental shift in market dynamics. The potential fusion of political and commercial imperatives raises unresolved geo-political questions that have been sharpened by the vaporization of credit markets as a consequence of the global financial crisis. State-controlled pools of capital have now eclipsed hedge funds and private equity in terms of funds under management, and the question of their regulation is therefore now of utmost importance. This book highlights the interplay between legal, corporate and policy imperatives associated with the regulation of state capital. Including contributions from leading practitioners, policymakers and academics, it provides an essential guide to professionals and academics in the fields of finance and business. Title Page 3 Contents 6 Preface 8 List of Contributors 10 Introduction 11 Sovereign Wealth Funds in an Evolving Global Financial System 11 1. The Rise of Sovereign Wealth Funds 14 2. The Policy Debate 17 References 21 Section 1: Structure and Impacts on the Global Economy 25 Chapter 1 What is a Sovereign Wealth Fund? 27 Reference 29 Chapter 2 Sovereign Wealth Funds and Global Capital Flows: A Macroeconomic Perspective 31 2.1. Introduction 31 2.2. What are Sovereign Wealth Funds? 33 2.2.1. Rationale Behind Establishment 34 2.2.2. Objectives and Types 36 2.3. What Do We Know About Sovereign Wealth Funds? 37 2.3.1. Assets Under Management 37 2.3.2. Transparency and Investment Strategy 41 2.4. Implications for Global Capital Flows and Asset Prices 42 2.4.1. Stylized Portfolio Analysis 44 2.4.2. Model Simulations 47 2.5. Conclusion 51 References 52 Chapter 3 A Portfolio Analysis of Sovereign Wealth Funds 53 3.1. Introduction 53 3.2. The Problem of Definition 54 3.3. Sovereign Wealth Fund Portfolio: Behind the Curtain 60 3.4. Implications of the Findings 75 3.5. Conclusion 78 References 79 Chapter 4 The Implications of Sovereign Wealth Fund Investment on Capital Markets: A Bottom-Up View 81 4.1. Introduction 81 4.2. Sources and Purpose 83 4.3. Current Size and Future Growth: A Bottom-Up Approach 87 4.4. Asset Allocation and Market Impact 91 4.4.1. Fixed Income 93 4.4.2. Public Equity 94 4.4.3. Alternatives 95 4.5. Friend or Enemy? 98 References 101 Section 2: Regulation and Public Policy Issues 103 Chapter 5 The Political Economy of Sovereign Wealth Funds 105 5.1. Introduction: From Heroes to Villains and Then What? 105 5.2. The Size and Management of National Savings 106 5.3. Future Generations and the Asset Allocation Problem 108 5.4. Domestic Development Versus Liquidity 110 5.5. Governance, Security and Management 111 5.6. Conclusion 113 References 113 Chapter 6 Open Capital Markets and Sovereign Wealth Funds, Pension Funds, and State-Owned Enterprises 115 6.1. Introduction 115 6.2. Differentiating Capital Pools 116 6.3. Governance Issues 120 6.3.1. OECD Pension Fund Guidelines 120 6.3.2. OECD Guidelines for State-Owned Enterprises 121 6.4. Sovereign Wealth Funds, Sovereign Pension Reserve Funds, and State-Owned Enterprise Investments in Host Countries 123 6.4.1. OECD Investment Instruments and Principles 123 6.4.2. National Security 124 6.4.3. Competition 126 6.4.4. Natural Resources Policy 127 6.4.5. The Exhaustible Resource Rent Issue and the Hotelling Rule 128 6.4.6. Appropriating and Investing Resource Rents 130 6.5. Foreign Investment Deal Flow 137 6.5.1. Changing Deal Flow Patterns 138 6.5.2. Sovereign Wealth Funds as Risk-Taking Investors in the GFC 149 6.6. Conclusion 149 References 155 Chapter 7 Negotiating a Voluntary Code 157 7.1. Introduction: The Setting 157 7.2. Organization 157 7.3. Objectives 158 7.4. Getting Started 159 7.5. Issues 160 7.6. Outcome 161 Reference 161 Section 3: Legal Implications 163 Chapter 8 Mapping the Trajectory of the Regulatory Debate: Securing the National Interest or Justifying Protectionism? 165 8.1. Introduction 165 8.2. The Santiago Process 167 8.3. Defining the National Interest 171 8.3.1. The United States 171 8.3.2. Australia 173 8.4. Conclusion 177 References 177 Chapter 9 Australian Regulation of Investments by Sovereign Wealth Funds and State-Owned Enterprises 181 9.1. Introduction 181 9.2. Overview of Australia’s Foreign Investment Regime 182 9.2.1. Prior Approval Under the Act 183 9.2.2. Treasurer’s Additional Powers Under the Act 184 9.2.3. Applications Under the Act 185 9.2.4. Prior Approval Under Policy 186 9.3. Case Studies 188 9.3.1. Chinalco’s Acquisition of Rio Tinto Shares — the “Dawn Raid” 188 9.3.2. Sinosteel and Murchison Metals 190 9.3.3. OZ Minerals and Minmetals 191 9.3.4. Hunan Valin and Fortescue 193 9.3.5. Chinalco and Rio Tinto — Strategic Partnership 194 9.4. Conclusion 195 References 196 Conclusion 199 Sovereign Wealth Funds: What Have We Learned? 199 1. Introduction 199 2. The Nature of Sovereign Wealth Funds 200 3. Policy Issues for Countries which Host Investment 205 3.1. Sovereign Wealth Funds and State-Owned Enterprises 205 3.2. The Exhaustible-Resource Rent Issue 207 4. Conclusion: The Politics of Investment 210 Index 211 Structure And Impacts On The Global Economy -- What Is A Sovereign Wealth Fund? / Stephen Grenville -- Sovereign Wealth Funds And Global Capital Flows: A Macroeconomic Perspective / Julie Kozack, Doug Laxton, Krishna Srinivasan -- A Portfolio Analysis Of Sovereign Wealth Funds / Christopher Balding -- The Implications Of Sovereign Wealth Fund Investment On Capital Markets: A Bottom-up View / David G. Fernandez -- Regulation And Public Policy Issues -- The Political Economy Of Sovereign Wealth Funds / Avinish Persaud -- Open Capital Markets And Sovereign Wealth Funds, Pension Funds, And State-owned Enterprises / Adrian Blundell-wignall, Gert Wehinger -- Negotiating A Voluntary Code / David Murray -- Legal Implications -- Mapping The Trajectory Of The Regulatory Debate: Securing The National Interest Or Justifying Protectionism? / Justin O'brien -- Australian Regulation Of Investments By Sovereign Wealth Funds And State-owned Enterprises / Greg Golding, Rachael Bassil. Editors Renée A. Fry, Warwick J. Mckibbin, & Justin O'brien. Includes Bibliographical References And Index. A guide to geo-political impact of sovereign wealth funds and state-owned enterprises on global markets. It highlights the interplay between legal, corporate and policy imperatives associated with the regulation of state capital. It is suitable for those in the fields of finance and business.