Assets under management of sovereign wealth funds (SWFs) and central banks are expected to rise to $12 trillion in 2012 from around $10.1 trillion at present, according to Merrill LynchÆs latest report on SWFs.

Central banks now control $7 trillion of reserves, up $1.3 trillion from a year ago. SWFs, meanwhile, manage around $3.1 trillion including the $2.5 trillion managed by the largest of such funds.

Merrill Lynch expects assets held by SWFs to surge over the next four years, to $8.5 trillion by 2012, while it expects central bank reserves to ease.

ôThe central bank tap is now being turned off,ö says Merrill Lynch in a report. ôThe era of rapid central bank reserve accumulation is now over, in our view. An intensified push toward rebalancing, satiated demand for reserves, and acquiescence of currency appreciation support this.ö

The top 20 central banks, 17 of which are from emerging markets, now control around $5.9 trillion of reserves. The increase is due to fresh reserve accumulation, investment proceeds of existing reserves, fund transfers and mark-to-market changes.

The big three central banks û China, Japan and Russia û remain at the top, with ChinaÆs central bank reserves up $473 billion on last year to $1.9 trillion, despite a $200 billion shift of funds to China Investment Corporation, the newly created SWF.

JapanÆs central bank reserves of $976 billion remain fully invested in US dollars, and register increases in value from bond yield returns.

Merrill Lynch notes the reasons why it expects central banks to cease any sharp accumulation of reserves.

First, a severe shortage of US dollars globally û caused by the US financial crisis that spread to the rest of the world û has lead to repatriation of US dollars back to the United States, and sharp downward pressures on most other currencies. This, in turn, has meant reduced reserve accumulation or even reserve drawdown in some cases, as central banks try to defend their currencies.

Merrill Lynch notes that global central bank reserves at the end of October 2008 were down around $70 billion from their peak in mid-August. A number of central banks have effectively rushed to supply US dollars back to the market.

Second, there has been a peaking and progressive unwinding of global imbalances that started some time in late-2006. Two years down the line, it is becoming increasingly apparent that the US current account deficit is now narrowing, as are the concomitant current account surpluses elsewhere, primarily in emerging markets.

These two trends imply less need for currency intervention and reserve accumulation and thus a levelling off in central bank reserves.

ôCentral bank reserves were accumulated for a rainy day,ö Merrill Lynch says. ôWell that day has now arrived and central banks are likely to use these reserves as part of their arsenal in dealing with the global financial and economic crisis. The longer the downturn, the more likely reserves are drawn down.ö

Expectations of an easing in central bank reserves and the continued transfer of funds to SWFs have a lot to do with Merrill LynchÆs projection of sharply more assets for SWFs.

Sovereign wealth funds attracted a lot of attention late last year when they embarked on a series of major cross-border equity investments.

SWFs have existed since the 1950s. Their asset size and clout in the investment community have grown dramatically over the past 10 to 15 years, however. Among the more prominent investments made by SWFs recently were those that involved the rescue of US banks that fell victim to the subprime crisis. For example, Singapore's Temasek Holdings bought a $5 billion stake in Merrill Lynch (it has committed a further $3.4 billion that is awaiting regulatory approval), while Abu Dhabi bought a $7.5 billion stake in Citigroup.

Top 20 central bank reserves, according to Merrill Lynch:

China - $1.9 trillion
Japan - $976 billion
Russia - $569 billion
India - $296 billion
Taiwan - $282 billion
Korea - $258 billion
Europe - $226 billion
Brazil - $204 billion
Singapore - $175 billion
Hong Kong - $158 billion
Algeria - $137 billion
Malaysia - $125 billion
Thailand - $99 billion
Mexico - $97 billion
Libya - $74 billion
Poland - $82 billion
Turkey - $76 billion
US - $62 billion
Nigeria - $61 billion
UAE - $61 billion

Largest SWFs, according to Merrill Lynch:

UAEÆs Abu Dhabi Investment Authority - $675 billion
Saudi ArabiaÆs Saudi Arabia Monetary Agency - $375 billion
NorwayÆs Government Pension Fund - $300 billion
SingaporeÆs Government Investment Corporation - $250 billion
KuwaitÆs Kuwait Investment Authority - $220 billion
ChinaÆs China Investment Corporation - $170 billion
RussiaÆs Reserve Fund $141 billion
SingaporeÆs Temasek - $90 billion
UAEÆs Investment Corporation of Dubai - $70 billion
AustraliaÆs Australia Government Future Fund - $51 billion
QatarÆs Qatar Investment Authority - $50 billion
USæs Alaska Permanent Fund - $34 billion
RussiaÆs National Wealth Fund - $49 billion
BruneiÆs Brunei Investment Authority - $30 billion
KazakhstanÆs National Fund - $27 billion