1 Group Members: Chang Meng Han Chang Chiao Min Lin Chun Tse Liu Lu Sovereign Wealth Funds: Trends, Opportunities and Concerns FINANCIAL MARKETS, GOVERNANCE AND REGULATION FINAL REPORT Professor: Pierre Francotte

Introduction 2 What is Sovereign Wealth Fund? State-owned investment fund investing globally in real and financial assets Purpose Stabilization Fund Saving Fund Development Fund Pension Reserve Fund Funding Foreign- exchange reserves surplus of natural resource Sovereign Wealth Funds CountrySWF nameAsset (billion USD) Transparency index NorwayGovernment pension fund-global89310 UAE-Abu DhabiAbu Dhabi Investment Authority7736 Saudi ArabiaSAMA foreign holdings7574 ChinaChina Investment Corporation6538 ChinaSAFE investment company5684 KuwaitKuwait investment authority5486 China-Hong KongHong Kong monetary authority investment portfolio 4008 SingaporeGovernment of Singapore investment corporation 3206 ChinaNational social security fund2025 SingaporeTemasek holdings17710 Top 10 players

Difference from nation-run entity 3 State-owned enterprises foreign- exchange reserve Purpose of operating short-term currency stabilization liquidity control Capitalization: shareholders, stock focus on the operation in specific industry or field nation-run entity

Pros and Cons of SWFs 4 Content Title Pros The risk of investment target or misallocation Cons Social welfare, Sustainable development Capital market stabilizing Active using idle capital Home market : Global market : Liquidity improvement and market development Pros Market stabilizing Protectionism or National security concern Lack of transparency and regulation Cons

Prevailing Concerns 5 Text1 Transparency Investment Strategy Inside Information Risk Management Performance Assessment Recipient Countries Home Countries Global Market Openness of the market Behave like other investors America and Europe appeal to establish a code of conduct for sovereign wealth funds with voluntary application

Governance and Regulations of SWFs 6 Recipient Country Policies (OECD) Santiago Principles (IFSWF) + To help maintain a stable global financial system and free flow of capital and investment To comply with all applicable regulatory and disclosure requirements in the countries in which they invest To invest on the basis of economic and financial risk and return-related considerations To have in place a transparent and sound governance structure that provides for adequate operational controls, risk management, and accountability. Legal framework, objectives, and coordination with macroeconomic policies Institutional framework and governance structure Investment and risk management framework Santiago Principles - 24 GAPP

Track Record of Implementation The International Forum undertook an internal survey of members’ experiences in applying the Santiago Principles in Most members thought transparency is the key element. ( Botswana’s Pula Fund & Norges Bank Investment Management) Some of the largest and most powerful SWFs in the Middle East didn’t comply with the Santiago Principles. (Abu Dhabi Investment Authority, Kuwait Investment Authority) In 2013, the survey told that their members had some improvement in GAPP Implementation, and Truman (2013) also observed the same thing.

SWF Scoreboard Put some pressure on their members who didn’t participate in the survey. Persuade those non- IFSWF members to join the group Truman’s (2013) findings is quite similar to the IFSWF survey.

Case study 1 : Norway Government pension fund global 9 Management Structure: Norge bank investment /Ministry of Finance /Council on Ethics Money sources : Purpose : Solve the non-renewable petroleum resources, smooth out the highly fluctuating in oil price and take precautions of an aging population problem By petroleum sector, including the taxes from companies and payment for license to explore, etc. Established1990 Asset US ＄ 893 billion OriginOil Transparency rating10 Pointprinciple of linaburg-maduell transparency index +1Fund provides history including reason for creation, origins of wealth,and government ownership structure +1Fund provides up-to-date independently audited annual reports +1Fund provides ownership percentage of company holdings and geographic locations of holdings +1Fund provides total portfolio market value,returns and management compensation +1Fund provides guidelines in reference to ethical standards, investment policies,and the enforcer of guidelines +1Fund provides clear strategies and objectives +1If applicable,the fund clearly identifies subsidiaries and contact information +1If applicable, the fund identifies external managers +1Fund manage its own web site +1Fund provides main office location address and contact information such as telephone and fax Investment strategies The portfolio is balanced Invest abroad only Well diversified Do not control over the target enterprise Never manipulate a single company's stock market price

Case study 2 : Sovereign Wealth Funds in China 10 Fund rankings in 2013 RanksNameAsset ($Billion)Inception 4China Investment Corporation SAFE Investment Company National Social Security Fund Newly-established Huge sizes Investment of SWFs in China CICSAFE Investment Focus Before subprime crisis: financial institutions After failure: gasoline, airline and so on Unclear Companies invested Before crisis: Blackstone, Morgan Stanley After: GDF Suez, Heathrow Airport Holdings Limited Royal Dutch Shell, BP Amoco, TESCO, Barclays Bank and so on (ratio of share holding< 1%) Amount21 billion dollars in billion dollars in billion dollars in 2010 Five million pounds in the British security market Source: Source :Feng, L. A study of economic effects of sovereign wealth funds [D]. Zhengjiang University

Case study 2 : Sovereign Wealth Funds in China 11 SWFs in China are unclearly oriented, and the ownership of the capital is still controversial. an investment fund a fund manager Ownership of SWFs in China Inconsistent with Santiago Principles SWF Risk Control CIC and SAFE do not publish their own risk management standard It is impossible for others to know how they judge risks. The general approach to the SWF’s risk management framework should be publicly disclosed”. Santiago Principles Subprinciple !? Santiago Principles 1.2. Subprinciple The key features of the SWF’s legal basis and structure, as well as the legal relationship between the SWF and other state bodies, should be publicly disclosed !?

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