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Sovereign Economics: The new behemoths of global finance

Sovereign Economics: The new behemoths of global finance
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First Published: Tue, Jun 19 2007. 12 23 AM IST
Updated: Tue, Jun 19 2007. 12 23 AM IST
Sovereign wealth funds are fast becoming the new masters of global finance. Morgan Stanley predicts these government-owned entities will grow to $27.7 trillion (Rs1,135.7 trillion) by 2022 from about $2.5 trillion today.
To some, they are agents of evil threatening to usurp other countries’ patrimonies by gobbling up strategic industries, imposing alien cultures and possibly igniting a cycle of financial protectionism that will harm the world economy.
“The US can ill afford the prospect of foreign interests moving in on important commodity and energy sources,” Russ Winter says in his wallstreetexaminer.com Web log. “One can easily envision a scenario where large sovereign funds legitimately take controlling interest of, say, a major oil producer or even a state-owned entity.”
If sovereign funds become the most important buyers of stocks and other assets, “the world will witness the intriguing spectacle of its largest private companies being owned by governments whose belief in capitalism is often partial,” says an entry on the Advanced Nanotechnology Ltd blog.
Yet, Americans and Europeans should welcome this mostly Asian and Middle Eastern cash. “Assuming there’s no true security issue involved, if they want to buy something, yes, by all means, let’s sell it to them,” says Gabriel Stein, a senior economist at Lombard Street Research Ltd in London.
“If a Chinese or Arab fund buys a company, they will either do well, in which case that’s good for the economy, good for employment,” he says. “Or else they will do badly, in which case they will sell it, possibly for less than they paid for it.”
Take Mitsubishi Estate Co. In 1989 and 1990, just before the US real estate market went into a tailspin, the Japanese developer paid $1.4 billion for an 80% stake in New York’s Rockefeller Center and later invested $600 million for improvements. In 1995, it handed over the landmark art deco style office and retail complex to its creditor. Later that year, the mid-Manhattan property was sold for $1.2 billion.
In the 1970s, the Arabs roamed the US and Europe looking for prime acquisitions. Then the Japanese did the same—until the Tokyo stock market waned in the early 1990s. Now, it’s Asian developing countries and, again, oil exporters seeking higher returns on their bloated foreign-currency reserves.
Asian reserves
Reaping the windfall of large trade surpluses, high oil prices and the foreign exchange that comes from currency transactions, many Asian countries and oil exporters hold more reserves than needed for prudential reasons. Governments are pressuring their central banks to earn higher returns than those on the safe, liquid treasurys that most hold. And commodity-rich countries are eager to build up pension assets for the day the oil, gas or whatever runs out.
Nations with the biggest funds include the United Arab Emirates with an estimated $875 billion, Singapore with $430 billion, Norway with roughly $300 billion and Kuwait with $70 billion, according to Morgan Stanley.
Meanwhile, China in March said it would create an investment agency, which analysts estimate would receive as much as $300 billion in seed money. Russia established a wealth fund in April, which will begin with $32 billion. Morgan Stanley predicts it might grow by $40 billion a year.
“For all the fuss about hedge funds, funds under management by sovereign welfare funds are about twice the size of hedge funds and growing and less transparent,” Terrence Checki, executive vice-president at the Federal Reserve Bank of New York, said at a conference in Athens on 31 May.
If sovereign funds are willing to overpay for assets just as their private sector brethren have done, there’s no reason why Americans and Europeans shouldn’t sell and get richer in the process. “Because sovereign funds are big investors and take long-term views, they may be willing to overpay and that might distort markets,” says George Magnus, London-based senior economic adviser to UBS AG. “But that’s something that all investors do eventually.”
What’s more, Westerners shouldn’t be concerned that these funds are out to rob the US and Europe of their crown jewels. “As sovereign entities pursuing investment objectives with future national interests in mind, they are simply very large investors,” Magnus says. “The idea that sovereign funds will be brash high rollers is not the characteristic of sovereign funds. On the contrary, they tend to be low-profile and cautious.”
Norwegian disclosure
“Our business is to be a prudent investor,” says Knut Kjaer, Oslo-based head of Norway’s Government Pension Fund, which practises the best disclosure of the sovereign funds. “The operation is very transparent, and the way we run the investments is well defined. I cannot see any difference between the way we and other large funds like pension funds operate.”
Of course, there are no guarantees that a government won’t try to use its financial muscle to achieve a political objective, such as threatening to dump dollars or attempting the takeover of a strategic company.
Still, international investors, especially central banks, owned 44% of outstanding US treasurys at the end of the first quarter; and regardless of past political disputes, no bank has gone on a selling spree.
No doubt, the US and Europe have strategic assets they don’t want to see in foreign hands—weapons manufacturers, key technology and aerospace firms—but everything else should be available for sale. And companies designated strategic should be genuinely vital to national security.
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First Published: Tue, Jun 19 2007. 12 23 AM IST