How the Rise of East Asian Sovereign Wealth Funds Affected the European Union?

Abstract

Europe remains a tempting destination for East Asian SWFs. Almost a third of their investments have been committed to EU countries. Nearly all of the assets have been invested by Chinese and Singaporean funds. The investment policy of East Asian SWFs has significantly evolved over the past few years. Their financial commitments between 2008 and 2014 were carried out in a broader range of sectors than before, which leads us to believe that they endeavor to diversify their European portfolios in a similar way to other SWFs. However, in terms of target sectors, they are much more exposed to infrastructure and much less to industrials. Stark contrasts are noticeable with regard to the exposure to the UK market. For East Asian SWFs, the UK is definitely the top destination, with 64% of all assets allocated to this economy. For other SWFs, notably from GCC states, it is also the most significant market, but they have held more diversified portfolios. The differences can be attributed to the strength of the traditional bonds between this top European financial center and both respective areas. Despite the widespread belief that SWFs routinely espouse politically-biased agendas, evidence supporting hostile activities by Asian SWFs is scant. Investment diversification and behavioral patterns similar to other market players help downplay concerns over the motifs of Asian investments in Europe (particularly heightened in times of economic crises in the Eurozone (Meunier 2011, 2014). Comparisons of East Asian SWF investments with other alternative asset managers (e.g. private equity funds and exchange traded products) demonstrate investor specific differences rather than a particular bias in the investment activity of such SWFs. Our research on Asian SWFs thus generally supports the claim (Mezzcapo 2009) that SWFs can be considered beneficial for target countries as they tend to be relatively large, highly liquid, long-term orientated, not significantly leveraged, and with a substantial appetite for risk-taking, while being less affected by market conditions (than other financial institutions). Thanks to these features East Asian SWFs should be perceived as market stabilizers rather than sources of market volatility.

Keywords: sovereign wealth funds, east asia, european union, investment management, political impact, financial and non-financial investment objectives, macroeconomic stability

JEL Classification: E63, F31, F50, G11, G15, G23, G24, H63, N20, N24, N25