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.