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.

Sovereign wealth funds (SWFs) form a new class of institutional investors with significant influence on the global financial market. Assets under management (AUM) of global SWFs totaled around US$3.0 trillion at the end of 2007, and are still rising. Three developments are behind the current cause of SWFs: First, reform of international monetary system is the core reason for the rise in SWFs; Secondly, the phenomenal raise of energy price is an important reason contributing in the expansion of SWFs; finally, the economic globalization facilitates SWFs’ operation. According to the model of "National Economic Man" model, the foreign reserve of a nation will increase sharply and gradually this nation will invest surplus wealth during the economic stage of early expansion or fast-growing stage. Whereas, with the decreasing of the production factors, accumulated wealth of a nation will gradually attain to peak. When the economy enters into wealth-oriented stage or the stage of sustainable low growth, the nation will increasingly rely on wealth accumulated by consumption, and incline to invest in risk-free assets. At present, the aims of SWFs are mainly focused on the following five aspects, including stabilization the national balance sheet for different periods, diversification of the central bank's reserves, smoothening inter-generation revenue of country, prevention of national socio-economic crisis and assistance of the government’s overall development strategy.

This paper firstly discusses alignment of SWFs with macroeconomic policy. We believe that SWFs can become an effective tool for fiscal policy; SWF investments should be made in alignment with the monetary authority, and help stabilize the exchange rate. SWFs also contribute to stability of the national balance sheet. Asset allocation of SWFs has significant impacts on the current and capital accounts of both domestic and international balance sheets. Secondly, this paper explores the impacts of SWFs on the global financial market and its stability, including those on asset bubbles, equity risk premium and financial market stability. We argue that the potential negative impact of SWFs on the global financial market is very limited, and that they are important stabilizing forces in the global financial market. We believe that SWFs contribute to the coordination of macroeconomic policy from a domestic point of view and to the stability of global financial market from an international point of view.

Sovereign wealth funds (SWFs) form a new class of institutional investors with significant influence on the global financial market. Assets under management (AUM) of global SWFs totaled around US$3.0 trillion at the end of 2007, and are still rising. Three developments are behind the current cause of SWFs: First, reform of international monetary system is the core reason for the rise in SWFs; Secondly, the phenomenal raise of energy price is an important reason contributing in the expansion of SWFs; finally, the economic globalization facilitates SWFs’ operation. According to the model of "National Economic Man" model, the foreign reserve of a nation will increase sharply and gradually this nation will invest surplus wealth during the economic stage of early expansion or fast-growing stage. Whereas, with the decreasing of the production factors, accumulated wealth of a nation will gradually attain to peak. When the economy enters into wealth-oriented stage or the stage of sustainable low growth, the nation will increasingly rely on wealth accumulated by consumption, and incline to invest in risk-free assets. At present, the aims of SWFs are mainly focused on the following five aspects, including stabilization the national balance sheet for different periods, diversification of the central bank's reserves, smoothening inter-generation revenue of country, prevention of national socio-economic crisis and assistance of the government’s overall development strategy.