Washington: For years, the Bush administration has shrugged off concerns about the trillions of dollars that the US owes to China, Japan and oil-producing countries in West Asia, 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 US and elsewhere. The fear is that these so-called sovereign wealth funds could

Fear factor: US treasury secretary Henry M. Paulson says that funds will naturally gravitate towards dollar-based assets because of the strength of the American economy.

In response, the Bush administration is pressing the International Monetary Fund (IMF) and the World Bank to examine the behaviour of these funds, which control up to $2.5 trillion (Rs103 trillion) in investments, and develop possible codes of conduct for them. Among the proposed rules would be an obligation to disclose investment methods and avoid interfering in a host country’s politics.

Officially, the US 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," said treasury secretary Henry M. Paulson Jr. “I’d like nothing more than to get more of that money. But I understand that there’s a natural fear that they’re going to buy up America." Still, a note of caution can be heard. One of the American concerns is philosophical. The US 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 markets of other countries.

Another concern is the sheer size and potential growth of these funds—an estimated $2.5 trillion in assets that exceeds the sum invested by the world’s hedge funds. Global financial services firm Morgan Stanley, in a widely cited study, projects these investment funds to 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.

“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 in Washington, D.C. “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."

Truman said it would be easy to imagine that in a future global crisis, Paulson might be calling not just central bankers, but also the directors of sovereign wealth funds.

The funds are a product of decades of the US importing more than it exports. High energy prices have yielded trillions for oil and natural gas producers, from Norway and Russia to West Asia, while the American thirst for imports of other goods and services has built up the reserves of China, Japan and other Asian exporter nations.

The political furor over these funds so far has been limited.

Neither Dubai’s bid for Barneys New York, the American retailer, nor China’s purchase of nearly a 10% stake in The Blackstone Group this year has produced an outcry in the US.

But in Germany, where there is concern about Russia buying pipelines and energy infrastructure and squeezing Europe for political gains, 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?" Merkel had 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 Pte Ltd, the state-owned investment branch of Singapore, purchased a stake in the company owned by the Prime Minister of Thailand, Thaksin Shinawatra. The deal eventually 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.

Peterson Institute’s Truman is one of many experts urging the US, IMF and World Bank to draw up codes of conduct that would keep politics out of investment decisions.

“A government is a different type of animal in the investing world," he said. “We call them sovereign wealth funds, but once you’re operating outside your own borders, you’re not sovereign in the same sense."

Others favour 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 University. “We don’t want that influence to be channelled in a reckless way."

Paulson and Robert M. Kimmitt, deputy treasury secretary, have travelled to China, Russia and the Persian Gulf to urge top financial officials to adopt greater disclosure of their investments and to ban government subsidies or other forms of incentives for their overseas investment activities.

The American administration is also telling these countries that they must open their properties to American investments if they want to invest in the US.