The great Mid-East and Asian challenge

The result is that these countries, the other Asian tigers and the oil-rich states of the Middle East have a vast amount of money to spend. They are no longer willing to recycle this by depositing it in the international banks of London and New York and they are less and less willing (unlike our pension funds) simply to buy government debt - whether denominated in dollars, sterling or euros - and reap miserable returns.

Instead, they want to buy equity stakes in real businesses and most have created, or will create, what are now known as sovereign wealth funds. These are in effect investment vehicles that they will use to channel their surpluses into what they hope will be productive investments.

There is nothing wrong with this, of course. But it promises to be a major diplomatic and economic challenge simply because the sums of money are so vast there is almost nothing they could not buy and they could end up owning a massive chunk of the West's assets. Politicians in America, and to a lesser extent Europe, are already beginning to panic and reaching for their protectionist shields.

Today Standard Chartered's chief economist Gerald Lyons publishes, with input from Oxford Analytica, a detailed study of the phenomenon, which he estimates already accounts for $2.2 trillion (£1.1 trillion) of assets and on current trends could amount within a decade to $13. 4 trillion.

Rather than simply looking at the size of the funds, Lyons also distinguished them in terms of investment philosophy. Thus he has what he calls the Super Seven funds from Abu Dhabi, Norway, Kuwait, China, Russia and two from Singapore, GIC and Temasek, and these collectively have about $100 billion of assets at present.

But several of these also crop up in what he describes as the Secret Funds - those which, unlike Norway for example, have an investment approach and philosophy that is not transparent. These include some of the funds from the UAE, China, Qatar, Brunei, Venezuela, Taiwan, Oman and Kuwait.

This is key because it is the potential source of a lot of fear and tension. Lyons says these funds are sure to become huge players in the world's financial markets, not just in bonds and equities but also in alternative areas like hedge funds, private equity and commodities trading. They are also, as we are seeing in the Qatar bid for Sainsbury, likely to be active in mergers and acquisitions. Their sheer scale also gives them the power to move into parts of the world shunned for various reasons by the West, which could raise all sorts of geopolitical implications, and become investors or owners of strategic assets within Western countries. Given that most of these funds are directly state owned or controlled, this is going to cause tensions.

The likely backlash is that Western governments will try to tell them what they can and cannot buy, which is something they may not take to kindly. What needs to happen, to give comfort, is that the funds become more transparent and the governments need to do more to open up their markets so it is not a one-way flow.

But this is not going to happen in the short term, nor in time to defuse the tensions - which could conceivably spill over into international trade. The Americans are already trying to protect strategic assets and the Europeans national champions, so the omens are not good.

Lyons' third point is perhaps the most telling. What we are seeing is the first stages of a hugely uncomfortable readjustment in the world pecking order as economic power drains out of the United States and Europe and into Asia.

As a short-term fix, the established countries may seek to use the International Monetary Fund or the World Trade Organisation to draft codes of conduct to govern the behaviour of sovereign funds, but they need to come to terms with the fact that these will not make much difference.

The reality is that the balance of power is shifting and, tragically, history has shown how hard this is to manage without conflict. Those who have the power are reluctant to let it go or to adjust to the new realities without a determined campaign of resistance. Those accumulating the power are impatient to collect their rewards, reluctant to proceed with caution and often feel little need to be sensitive to the concerns of countries in decline.

Handling this transition peacefully and equitably is one of the most serious challenges the world faces in the coming decade.