Sovereign Wealth Funds

Investment funds run by foreign governments, also called ‘sovereign wealth funds’ have been in existence since the 1950’s. China, Singapore, Dubai, Norway, Libya, Qatar and Abu Dhabi have all built up a sizeable surplus of domestic savings over investment.

Norway’s oil fund is the world’s largest sovereign wealth fund and is worth > $760bn. According to a report in the FT in 2013, it owns on average about 2.5% of every listed European company

Now some other countries with large reserves of oil and gas are setting up their own funds – in 2012, Tanzania announced it is to set up a sovereign wealth fund. Not all have been successful. Nigeria’s has operated an Excess Crude Account the surpluses from which have been largely used to pay off existing international debts.

China established its official sovereign wealth fund China Investment Corp (CIC) five years ago with the aim of earning high returns by investing abroad the dollars China earns from its exports. In 2012, CIC’s $410bn sovereign wealth fund, bought an 8.68 per cent stake in Thames Water, the water network that serves London. It also has investment stakes in France’s GDF Suez, Canada’s Sunshine Oil sands and Trinidad and Tobago’s Atlantic Liquid Natural Gas Company.

Sovereign wealth funds are already having an important effect on the UK.

For example, Singapore's Temasek owns stakes in Barclays and Standard Chartered, while Qatar and Dubai between them own about a third of the London Stock Exchange. The government of Singapore has built up a 3% stake in British Land. Dubai's sovereign wealth fund, Dubai International Capital (DIC) has invested money in building stakes in UK companies, including Travelodge and the London Eye.

Many sovereign wealth funds have provided an injection of fresh capital for the UK banking system in the wake of the losses sustained from the sub-prime crisis and the credit crunch. The banks have needed to re-capitalize to repair their balance sheets, improve their chances of survival and provide a stronger platform for a recovery in lending to businesses and individuals who need loans.