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Wealth fund money is in danger of distorting markets.

Sovereign wealth funds threaten world markets, investors say

Investors say the tide of money is in danger of distorting economies from their financial reality

With returns on government bonds at rock-bottom prices, sovereign wealth funds are muscling into stock markets and other higher-yielding assets such as real estate at a rate that private investors warn could destabilise the world economy.

Since central banks cut interest rates to record lows in a bid to shore up flagging economic growth, world governments have had to look farther afield to grow public pension money or central bank currency reserves. But the resulting tide of money is in danger of distorting markets, causing prices to reflect political priorities rather than financial reality, insiders say.

It is also threatening to inflate the very price bubbles that central bank teams globally are working so hard to prevent, experts suggest.

"There is quite clearly both an actual and a potential conflict of interest ... there should be some sort of code of practice," said David Marsh, managing director at the Official Monetary and Financial Institutions Forum, which researches public financial institutions.

Sovereign investors manage assets worth US$29.1 trillion - equivalent to 40 per cent of the global economy - which are held by 157 central banks, 156 public pension funds and 87 sovereign wealth funds, the forum said.

The money originates often from natural resource revenues after a commodities boom - as in the case of Norway, which runs the world's biggest sovereign fund thanks to its oil reserves.

On the other hand, sovereign wealth funds can reflect an accumulation of manufacturing export revenues, as is the case with China.

Norway's US$890 billion fund owns 1.3 per cent of all global shares and aims to put more of its cash in assets other than bonds, such as equities, infrastructure and real estate.

And China Investment Corp, with US$575 billion in assets, allocates around 32 per cent of its global investments to public equities and a similar proportion to "long-term" investments, including private equity, real estate and infrastructure, the forum says.

Yngve Slyngstad, chief executive of Norway's sovereign wealth fund, conceded the potential for distortions created by state-backed funds' involvement in markets but stressed his fund addressed the issue with strict internal guidelines.

"It is not an issue that I take lightly," he said. "We have put in place some obvious things like a very high requirement of transparency, limits on ownership, being as clear as possible on how we deal with our ownership roles."

Growing anxiety about the rise of state-backed funds taking part in capital markets prompted the International Monetary Fund to sit down with an international group of them in 2008 to draw up a set of voluntary practices on transparency and disclosure.

The Organisation for Economic Cooperation and Development has also compiled guidelines on corporate governance of state-owned enterprises that specifies the need to avoid conflicts of interest within state bureaucracies and central banks.

This article appeared in the South China Morning Post print edition as: Sovereign wealth funds 'threaten world markets'
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