Sovereign Wealth Funds

When I hear of Sovereign Wealth funds in the UAE and China buying assets outside of their respective countries or regions I am always curious about how they operate. What’s stopping China or any of these funds that have their own currency from just running the printers 24 x7 and buying valuable assets with new money.

For a start, they would inflate and devalue their currencies.
It’s a balancing act. By buying foreign assets (particularly foreign government debt), they can keep the value of their currencies artificially low, improving the competitiveness of their exports, but if they overdo it by printing too much money to do the buying, they weaken them too much, raising the local cost of their inputs (particularly imported ones) and driving up inflation at home.

By using only their trade surplus, but not significantly more, to buy foreign assets they can both limit inflation at home (by effectively not repatriating profits and recycling them in the local economy) and keep their currencies advantageously weak (by buying assets in and thus strengthening foreign currencies, particularly if they buy foreign government debt). If they print too much money they start to lose both advantages, because their economies don’t consist purely of internal circulation and exports. There will always be something to be imported, either for processing and re-export or for domestic consumption, whose costs will rise, driving local inflation up and competitiveness down. They want their currencies to be weak, but not too weak and above all, to be stable.

Expect a more detailed (and polemical) analysis from Daniel Plainview. :wink: