Move over hedgehogs and private equity barons. There is a new fear haunting national regulators—sovereign wealth funds (SWFs).
Australia has this month become the first country to hint that it may impose curbs on money coming in through quasi-government investment firms. It has published six principles to “enhance transparency of Australia’s foreign investment screening regime”. And AP reported on Monday that the European Union (EU) would set out a code of conduct for SWFs.
Both Australia and EU have been careful to distinguish between various types of investments by SWFs. They say they have few problems with investments that are meant to maximize portfolio returns. Their worries are about the use of government cash hoards to make investments to further political and foreign policy goals.
These responses are yet another indication that the world of global money is changing. In an article published in the latest McKinsey Quarterly, Diana Farrell and Susan Lund say that the structure of global finance is shifting.
Four new investor groups—petrodollar assets, Asian central banks, hedge funds and private equity— controlled $8.5 trillion at the end of 2006; that’s nearly thrice of what it was in 2000. SWFs use both petrodollars and central bank funds.
That seems like an awful lot of money, but it currently amounts to just 5% of the total financial assets in the world. But this share will undoubtedly increase and hence the extra attention from regulators and politicians. It is quite likely that recipient governments will push for greater transparency and the countries funding SWFs will at least partially lift the veils of secrecy on these funds.
So, regulation is needed. But it should have a light touch rather than involve the heavy hand of protectionism. Otherwise, it is quite likely that Western governments will raise the SWF bogey to block acquisitions in their countries. Europe has a long history of protecting “national champions.” Even the US has blocked deals in ports and oil.
And it’s also time the debate on how to deal with SWF money starts here in India as well.
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