Shadow Financial Regulatory Committees ofAsia and Japan

Joint Statement
Tokyo, July 7, 2008

Making Sovereign Wealth Funds Mutually BeneficialSummary
Many surplus countries are setting up Sovereign Wealth Funds. Their increase in number andsize, and their move into equity investments have provoked fears, not only in developing
countries but also in Western countries. The solution currently proposed by the IMF is tocommit the Sovereign Wealth Funds to a code of best practice. This would not address thefundamental problem: distrust of foreign powers in commercial decisions. However, the fears
could be alleviated if sovereign investment were channeled via a number of competing“Mutual Wealth Funds”, each with diverse sovereign investors. Such collective investment
vehicles would insulate sovereign investment from the control of any particular country.

1. Foreign exchange reserves in surplus countries now far exceed what they require forimport cover and exchange rate stabilization. The low returns on US Treasury securities andfear of US dollar depreciation have led to a search for investments with higher returns. For
this purpose, many countries have established Sovereign Wealth Funds (SWFs). Since global
imbalances are likely to grow for the foreseeable future, SWFt are likely to become evenmore prominent.
2. The increasing number and size of SWFs and their shift to equity investment have createdtensions. Western democracies welcome foreign investment in their bonds, and investment intheir companies by private foreign companies and by state-linked entities controlled bydemocratic governments. But suspicion and fear have greeted investment in Westerncompanies by entities controlled by states such as China, Russia, and the Gulf Petro-powers— which run the largest surpluses.
3. Concerns about SWFs include:a) Manipulation of corporate policies to advance the sovereign investor’s geopoliticalagendab) Foreign control of strategic assetsc) SWF extraction of commercial secretsd) SWF abuse of market powere) Meddling by inefficient state bureaucracies
4. The only proposals to address such concerns that countries are likely to accept consist ofrequiring SWFs to commit to a code of best practice. An example is the recent agreement
between the US Treasury, Singapore and Abu Dhabi, which is likely to form the basis for thecode that the IMF is scheduled to deliver in October 2008. However, even if an SWF iscommitted to such a code, it is unlikely to alleviate the concerns, since politicians in recipient
countries could always detect a geopolitical agenda in any large commercial decision. The
basic problem is a fundamental distrust in any entity controlled by a foreign power. This
distrust is likely to be extended to the foreign power’s commitment to the code of conduct.
5. Then, what is a credible mechanism by which an SWF can commit to a code of conduct?
We propose that SWFs invest a portion of their funds through a “Mutual Wealth Fund” or“MWF” whose ownership and governance structure would make it credible so that all its
investors would operate purely on the basis of commercial principles. The MWFs wouldhave:•A charter that commits them to transparency and good corporate governance, forexample, the code of conduct to be proposed by the international working group led by

the IMF••

Professional managers supervised by a board that represents SWF shareholdersA limit on the percentage of shares held by the SWF of any individual country, or groupof countries with similar economic and political interests, such as oil exporters

An MWF with these features would have heterogeneous ownership and would set investment
policies collectively, but would leave them to be implemented by independent professional
managers. This would prevent any single country or group of similar countries fromcontrolling managerial decisions to suit itself. This should alleviate the concerns listed inparagraph (3). Further reassurance would be provided if each country allocated its surplus
across several MWFs led by independent managers. The MWFs would have to compete for
SWF investment on the basis of investment performance; they would have to compete forinvestment opportunities on the basis of their transparency and record of politicalindependence.
6. An MWF could be launched at the initiative of a reputable investment managementcompany, a group of surplus countries, or by a neutral country with no SWF, such as Japan.
MWFs would differ from existing mutual funds by investing for the long-term, rather thancompeting on the basis of relative quarterly performance to attract and retain retail investors.
MWFs would differ from the current outsourcing of sovereign asset management toinvestment companies by (i) sourcing funds from a variety of countries and pursuing only
long-term objectives that are collectively agreed and (ii) committing to transparency andgood global citizenship.
7. MWFs may provide attractive vehicles for countries with large surpluses that seek torecycle them for high long-term returns without controversy, as well as for countries withsmaller surpluses that lack the experience and institutional infrastructure for sovereign
investment. The credibility of an MWF would be enhanced by participation from SWFs ofneutral “global citizens” like Norway and New Zealand.
8. Rising energy prices and global imbalances require economic cooperation between surplus
and deficit countries, but the growing prominence of SWFs has created political tensions
between them. The MWF proposed here would provide a useful vehicle for cooperation, as
they would operate on sound economic principles, yet diffuse political tensions.