Japan’s reputation as a major economic power is long established – but now other Far Eastern countries are making the jump from “developing” to “developed”. In particular, the last two decades have seen China evolve from bystander to economic superpower and its growing economic influence has led some commentators to speculate about its longer-term position in the global pecking order. For now, the US remains the economic powerhouse of the world, but China is already viewed as a force to be reckoned with.

The rise of the middle class in China is significant, particularly at a time when the US, Europe and the UK are experiencing a consumer slowdown: demand from affluent consumers in developing nations could provide some support for companies whose established customer base is feeling the pinch. However, soaring food prices are having a negative effect on China’s people, many of whom have become accustomed to a relatively comfortable existence over the last few years. China’s agricultural capacity and processes have not kept pace with its urban and industrial expansion and, although incomes have grown significantly, food prices are now rising faster than wages.

Will China go unchallenged as a global economic force of the future? Perhaps not. For now, China remains the most populous country in the world with 1.3 billion people, closely followed by India, which has a population of 1.1 billion, and whose booming economy has also been the focus of much attention. Looking ahead, the government’s official “one-family, one child” policy is likely to mean that China’s population begins to plateau over the next few decades, while India’s population is expected to increase.

China’s development has influenced almost every area of the global economy. Strong demand from other nations for its cheaply manufactured products has helped the economy expand rapidly; however, this vibrant economic growth has had its downside, and the Chinese government has sought to cool down the country’s export-fuelled growth. Meanwhile, inflation continues to run at very high levels, stoked by surging food prices, and the country’s insatiable appetite for raw materials and oil, driven by the rapid development of its infrastructure and booming demand for its exports, has helped to stoke surging commodity prices. Ultimately, in common with the rest of Asia, China is unlikely to prove immune to the full effects of a US-led slowdown, and this could help to put a brake on China’s growth in the short term.

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Sovereign wealth funds have been in the news recently amid rising concern about their activities. But what are sovereign wealth funds, who is behind them, and why are people worried about them?

Sovereign wealth funds are government-controlled investment funds, created when countries with surplus cash elect to invest some of that money. Most of the significant sovereign wealth funds are owned by the governments of booming Asian countries, such as China, or oil-rich countries such as Kuwait or Norway. Their substantial assets under management mean that, when they buy shares in a company, their stake tends to be sizeable.

Sovereign wealth funds hit the headlines initially last year as investment banks took their investments as support in the outbreak of the credit crisis. More recently, a Chinese fund has accrued a stake of almost 1% in UK oil giant BP, following the acquisition of an already significant stake in French oil company Total. Some market watchers have become concerned about the motives behind these purchases; China needs to have oil in order to fuel its ongoing expansion, and some commentators have flagged the possibility that China might be building stakes in major oil companies in order to gain influence within the sector.

Most of these funds tend to be secretive, a factor that has fuelled these questions about motivation. Many detractors are concerned about the possibility that an underlying government might actually aim to interfere in the running of a company in which they are invested. In addition, accusations of speculative activity have been levelled against some managers. However, defendants of the funds argue that the managers are just looking for long-term, stable returns like any other investor.

Although sovereign wealth funds have hit the headlines relatively recently, they are hardly the new kids on the block. Indeed, some have been around for a long time; for example, the Kuwait Investment Authority was founded more than fifty years ago in 1953.

Looking ahead, there are moves afoot to persuade sovereign wealth funds to sign up to a code of conduct that would ensure greater disclosure about their assets and investment strategy. It is unlikely that all the governments involved would be willing to accede to such an agreement; however, until sovereign wealth funds become more open about their investment activity, their detractors are likely to remain critical.

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