August 21, 2007
A Fear of Foreign Investments
By STEVEN R. WEISMAN
WASHINGTON, Aug. 20 For years, the Bush administration has
shrugged off concerns about the trillions of dollars that the
United States owes to China, Japan and oil-producing countries in
the Middle East, arguing that these debts give no undue leverage to
foreign governments.
But at a time of global financial instability, the administration
has started to worry that foreign governments are increasingly
converting their dollar holdings into investment funds to acquire
companies, real estate, banks and other assets in the United States
and elsewhere. The fear is that these so-called sovereign wealth
funds could destabilize markets or provoke a political
backlash.
In response, the Bush administration is pressing the International
Monetary Fund and the World Bank to examine the behavior of these
funds, which control up to $2.5 trillion in investments, and
develop possible codes of conduct for them. Among the proposed
rules would be an obligation to disclose investment methods and to
avoid interfering in a host countrys politics.
Officially, the United States welcomes all investments, except
those that could compromise national security. Money is naturally
going to gravitate toward dollar-based assets because of the
strength of our economy, the Treasury secretary, Henry M. Paulson
Jr., said in an interview. Id like nothing more than to get more
of that money. But I understand that theres a natural fear that
theyre going to buy up America.
Still, a note of caution can be heard. One of the American concerns
is philosophical. The United States has for years preached the
gospel of privatization, calling on other countries to sell their
government-owned industries.
Now, with sovereign wealth funds, many experts are asking whether
cross-border investment is evolving into cross-border
nationalization, raising the prospect of government interference in
free markets, only this time, in other countries markets.
Another concern is the sheer size and potential growth of these
funds. Their estimated $2.5 trillion in assets exceeds the sum
invested by the worlds hedge funds. Moreover, Morgan Stanley, in a
widely cited study, projects that these investment funds could grow
to a staggering $17.5 trillion in 10 years.
Though sovereign wealth funds do not appear to have played a role
in the recent turmoil in global markets, experts say they could in
the future, in favorable or unfavorable ways by selling assets
abruptly and precipitating a crisis, or by bailing out funds or
companies that are in trouble.
They could become either the source of the problem or part of the
solution, said Edwin M. Truman, senior fellow of the Peterson
Institute for International Economics. When you have foreign
governments holding stocks and bonds, not just Treasury securities,
you have to ask whether they will be a stabilizing force or a
destabilizing force.
Mr. Truman said it would be easy to imagine that in a future global
crisis, Mr. Paulson might be calling not just central bankers but
also the directors of sovereign wealth funds. He may be calling
them right now, for all we know, he added.
The funds are a product of decades of the United States importing
more than it exports. High energy prices have yielded trillions for
oil and natural gas producers, from Norway and Russia to the Middle
East, while the American thirst for imports of other goods and
services has built up the reserves of China, Japan and other Asian
exporters.
The political furor over these funds so far has been limited.
Efforts this year by China and Singapore to buy stakes in Barclays
Bank in Britain, and by Qatar to take over Sainsburys supermarket
chain in Britain, have caused little stir in Britain.
Neither Dubais bid for Barneys, the American retailer, nor
Chinas purchase of nearly a 10 percent stake in Blackstone this
year has produced an outcry in the United States, although there
has been some repercussion in China over the recent losses in the
Blackstone investment.
But in Germany, where there is concern about Russias buying up
pipelines and energy infrastructure and squeezing Europe for
political gain, Chancellor Angela Merkel has warned that purchases
by foreign governments or government-controlled companies pose a
risk.
How do we actually deal with funds in state hands? Ms. Merkel
said at a news conference in July. This is a phenomenon which
until now has not existed on such a scale.
Probably the most political turbulence caused by a
sovereign wealth fund occurred when Temasek Holdings, the
state-owned investment branch of Singapore, purchased a stake in
the company owned by the prime minister of Thailand, Thaksin
Shinawatra. The deal fed antigovernment demonstrations that led to
his ouster in a coup in 2006.
The worry is that beyond the possibility of foreign funds pushing
up prices on bonds, stocks and real estate, they might exercise
inappropriate control politically or in the private sphere.
Mr. Truman of the Peterson Institute is one of many experts urging
the United States, the International Monetary Fund and the World
Bank to draw up codes of conduct that would keep politics out of
investment decisions and require the funds to share information
about the composition of their portfolios and their investment
strategies.
A government is a different type of animal in the investing
world, he said. We call them sovereign wealth funds, but once
youre operating outside your own borders, youre not sovereign in
the same sense.
Others favor requiring the funds to place their investment
decisions in the hands of nonpolitical managers.
As Asian countries and petro states get rich, they certainly have
the money to try to exert influence, said Kenneth S. Rogoff,
professor of politics and public policy at Harvard. We dont want
that influence to be channeled in a reckless way. There has to be
transparency in company governance and financial governance to
protect against it.
Mr. Paulson and the deputy Treasury secretary, Robert M. Kimmitt,
have traveled to China, Russia and the Persian Gulf to urge top
financial officials to adopt greater disclosure of their investment
practices and to ban government subsidies or other forms of
incentives for their overseas investment activities.
The administration is also telling these countries they must open
their properties to American investments if they want to invest in
the United States.
In an interview, Mr. Kimmitt said sovereign funds seemed to be
acting on sound financial practices and not political motivations,
at least so far. When I was in China and Russia, I was struck by
the degree to which, although I was talking to government
officials, it was like talking to asset managers, he said.
Sovereign wealth funds have been around for decades. The
Kuwait General Reserve Fund was established in 1960. The Abu Dhabi
Investment Authority was established in the 1970s and today has
investments totaling roughly $800 billion, making it the worlds
largest such fund.
With $300 billion in its fund, Norway is seen by many
financial experts as a model for disclosure of portfolio strategy,
holdings and methods. But it is also unabashedly political,
recently withdrawing its investment in Wal-Mart, citing accusations
that the company has violated child-labor laws and scuttled efforts
by employees to unionize.
But China and Middle East countries have a long way to go before
they are as transparent as Norway is. Some experts wonder what
would happen if China took over an American pharmaceutical company
and pressed for changes in prescription drug programs. Likewise,
what would the reaction be if an Arab government demanded a bailout
or tax break for its company in return for supporting peace talks
in Iraq or Israel?
If these funds buy into a big Fidelity mutual, they make standard
kinds of investments that the Yale endowment makes, said Lawrence
H. Summers, the economist who served as Treasury secretary and
president of Harvard. But if they make more direct investments,
they become meaningful actors in the economy, and that raises many
more questions.
President Bush recently signed a bill to streamline the process of
screening and possibly rejecting purchases of American companies by
foreigners on national security grounds. But these account for only
about 10 percent of such purchases, the Treasury Department
says.
