Optimal Scale and Asset Allocation of SWF: China's Case

27 Pages Posted: 3 Jan 2009

See all articles by Yueyan Zhang

Yueyan Zhang

affiliation not provided to SSRN

Xianhua Wei

Chinese Academy of Sciences-Graduate University

Yue Hou

affiliation not provided to SSRN

Date Written: September 30, 2008

Abstract

This paper studies the optimal scale and asset allocation of Sovereign Wealth Fund (SWF), taking China's SWF as an example. We use the AR (1) process to simulate the future foreign exchange earnings of China and generate three patterns of the future earnings. With these three scenarios and based on Deaton's precautionary saving model, we find that the optimal scale and asset allocation of China's SWF mainly depend on the expected trend and fluctuation of the future foreign exchange earnings and expected yields that SWF can get. When foreign exchange earnings shows an upward trend, the scale of SWF should not be expanded even the expected investment yield is very high, and ratio of risky assets should be kept stable and high. When foreign exchange earnings is stabilized as its growth rate slows down, the scale of SWF has the positive correlation with the degree of earnings fluctuation and expected yield of investment, and also ratio of risky assets is generally lower. When foreign exchange earnings decrease, the scale of SWF should be expanded even the expected investment yield is not so high, and the ratio of risky assets is dependent on the characteristics of expected investment yields. We also conclude that investment policy of China's SWF should follow Temasek's investment model, under the current trend of China's foreign exchange trend, and strive for high yield investment chances.

Keywords: Sovereign Wealth Fund, Asset allocation, Investment

Suggested Citation

Zhang, Yueyan and Wei, Xianhua and Hou, Yue, Optimal Scale and Asset Allocation of SWF: China's Case (September 30, 2008). Available at SSRN: https://ssrn.com/abstract=1319887 or http://dx.doi.org/10.2139/ssrn.1319887

Yueyan Zhang

affiliation not provided to SSRN

Xianhua Wei (Contact Author)

Chinese Academy of Sciences-Graduate University ( email )

#80, Zhongguancun Dong Lu
Beijing, Beijing 100080
China
8610-8268 0938 (Phone)
8610-8268 0834 (Fax)

Yue Hou

affiliation not provided to SSRN

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