When China Investment Corp. (CIC) executive Jianxi “Jesse” Wang popped in to the National People’s Congress in Beijing this month, he got an earful from top Communist Party officials. They wanted to know what was happening with CIC’s investments, particularly its money-losing $3 billion (Rs12,000 crore) bet on US private equity firm Blackstone Group Lp. and the $5 billion it ploughed into investment bank Morgan Stanley.
Wang is not alone among the sovereign wealth fund (SWF) brigade in having to fend off local critics, including fellow bureaucrats, politicians and an increasingly critical domestic press. Thousands of kilometres away in Kuwait City, Bader Al Saad is bracing to defend investments made in Merrill Lynch and Co. Inc. and Citigroup Inc. by the Kuwait Investment Authority (KIA), the $200 billion-plus fund that he looks after, when the country elects a new parliament later this spring.
SWFs such as CIC and KIA are no longer particularly worried about xenophobic American or European politicians. Sure, they kicked up a fuss and demanded restrictions when funds linked to Asian and West Asian governments rushed to the aid of Western banks. And the International Monetary Fund set about drafting voluntary investment guidelines for SWFs. But the more stinging censure has come from domestic critics who are concerned that SWFs may be squandering their nations’ treasure on ill-timed shopping trips abroad.
It’s easy to see why. Since the credit crisis unfolded in earnest late last year, these funds—and others from Singapore, South Korea, Abu Dhabi and elsewhere—have provided more than $50 billion of fresh capital to US banks as well as to Barclays and UBS AG in Europe. So far, these have made terrible investments. The weighted average of the share prices of the big banks the SWFs invested in is down by some 30% since they bought in. Yet how these funds handle domestic criticism could provide clarity on the real nature of their mandates. Most sovereign wealth funds say they are passive investors. Their stated primary aim is to maximize returns on their governments’ surplus capital—generated by the sale of oil or the export of manufactured goods.
If that is their objective, it follows that there should be ramifications if the investments turned out poorly. Would the Chinese government seek a change in the way CIC is run if Blackstone—whose shares have halved in value since CIC bought its 9.9% stake last May—continues to slump? Would Kuwait’s ruling Al Sabah family shake up KIA if its bets on Citigroup and Merrill fail to pay off?
It may be too early to ask such questions. For one thing, the recent investments in Wall Street firms are just pieces of larger portfolios. KIA, for example, has a wide range of investments, including in manufacturers such as Daimler AG. And CIC isdedicating about $130 billion of its $200 billion fund to four Chinese banks, with most of the rest allocated to third-party fund managers.
These nuances may be lost on domestic politicians, party officials and, indeed, the media. So as the credit crunch continues, the managers of SWFs may need to prepare for intensified scrutiny at home.
That is, unless returns aren’t the most important factor. Some governments almost certainly do have other objectives. By recycling their dollars into the US and shoring up its banking system, they may help ensure a stable market for the oil they produce and the goods they manufacture. Making that argument would earn an “I told you so” from sceptical foreigners. But it just might persuade their constituents to go easier on them.