[轉載] Sovereign-wealth funds-Asset-backed insecurity
From The Economist print edition
Wall Street, the flagship of capitalism, has been bailed out by state-backed investors from emerging economies. That has people worried—for good reasons and bad
IN REYKJAVIK almost two years ago the Norwegians were throwing their weight around and the locals were furious. Having spotted that an Arctic boom was about to end, a government-owned fund from Oslo must have thought it had found an easy way to make money in a market it knew well. It began to sell short the bonds of Iceland's over-stretched banks. Only common sense, you might argue.
Halldor Asgrimsson, then Iceland's prime minister, did not see things quite like that. Why was the Norwegian state investing hundreds of millions of dollars to undermine Iceland's economy? Had not both countries signed a Nordic mutual-defence pact against financial destabilisation? “We must protest against this action,” he told Morgunbladid, a newspaper.
On Wall Street in the past few weeks, the sums have been bigger and the actions more benign—at least so far. This week Merrill Lynch and Citigroup became the latest to get the sovereign-wealth treatment, picking up a further $6.6 billion and $14.5 billion respectively, much of it from governments in Asia and the Middle East (see article). Sapped by the subprime crisis, rich-world financial-services groups have been administered nearly $69 billion-worth of infusions from the savings of the developing world in the past ten months, according to Morgan Stanley.
Norse raiders one year and white knights the next, sovereign-wealth funds are as hard to grasp as shadows. In principle everyone welcomes foreign investment. But when the money belongs to other governments, people—especially politicians—are not always so sure. America's Congress has uttered barely a squeak as Wall Street's titans have taken foreign cash. But when credit was loose it was alarmed at the state-backed acquisitions of oil companies and ports.
Some funds, such as Norway's, behave as capitalists bent on making as much money as they can. Others may have “strategic” goals—to nurture national champions, say, or to galvanise regional development. Sovereign-wealth funds are a way to help recycle emerging-market surpluses. And yet suspicion about their motives could make their money much less welcome: rather than accepting investment from sovereign-wealth funds, countries could turn to financial protectionism.
You can see why a call from Canada's Alberta Heritage Savings Trust Fund may strike you differently from an offer by Venezuela's Investment Fund for Macroeconomic Stabilisation. The question of what to do with other governments' money is becoming more urgent by the month. The 29 sovereign-wealth funds monitored by Stephen Jen, an economist at Morgan Stanley who has followed them closely, are now worth about $2.9 trillion (see table).
His list contains a wide range of funds. The Abu Dhabi Investment Authority, of the United Arab Emirates, worth $875 billion, is biggest. But the table also includes the China Investment Corporation (CIC), which last year was sent into the world with $200 billion in its back pocket; and Alaska's $38 billion Permanent Fund, based on the state's mineral wealth.
Although sovereign-wealth funds make up only 2% of the world's $165 trillion-worth of traded securities, they have a lot of firepower: more equity than private equity and more funds than hedge funds (see chart 1). In a paper for RGE Monitor, a research firm, Brad Setser and Rachel Ziemba conclude that the Gulf rivals China as a “new financial superpower”.
Moreover, sovereign wealth is growing fast. Mr Setser and Ms Ziemba reckon that the Gulf's big funds could gain another $300 billion to manage this year alone. If you combine that with Asia's surpluses and the marvels of compound interest, you soon get to some large numbers. Simon Johnson, the IMF's chief economist, thinks sovereign-wealth funds will be worth $10 trillion by 2012. Mr Jen has pencilled in $12 trillion for 2015. But even at that rate of growth, the funds will probably still account for less than 3% of global traded securities.
The idea that governments should put something aside for a rainy day has a long and respectable history. Kiribati, a Pacific island country that mined guano for fertiliser, set up the Kiribati Revenue Equalisation Reserve Fund in 1956. Today the guano is long gone, but the pile of money remains. If it manages a yield of 10% a year, the $400m fund stands to boost the islands'GDP by a sixth. Many oil producers now run similar schemes for similar reasons. Today's windfall is too big to spend in one go at home without waste and inflation. It is wiser to save for times when oil prices are low or for the generations who will come after the oil runs out.
In addition, returns on a portfolio of assets are likely to be higher than on a single commodity. Chart 2 shows, for instance, by how much equities outdid oil between 1985 and 2007. Better for an exporter to sell as much oil as it can today and invest the proceeds, than to leave the stuff in the ground in the hope of spreading production over the decades. The recent run-up in the price of oil and other commodities only adds to the attraction of producing now while the going is good.
Commodities are not the only source of sovereign wealth. Many Asian emerging markets have been running current-account surpluses at the same time as they have been managing their exchange rates. As they have mopped up dollars, using government bonds, they have accumulated reserves. At first these went into safe, liquid assets like American Treasury bonds—the Asian financial crisis of 1997-98 was still a recent memory and many countries were keen to amass reserves. But economies like China, South Korea and Taiwan now have more reserves than they need to defend themselves against shocks. Their governments understandably want to earn a higher return than Treasury bonds will pay, so they create a fund to manage their assets.
Like other sovereign funds, these tend to invest government money, often abroad and for long periods, in relatively risky assets. Yet the funds do not only come from a wide array of countries; they also have a variety of motives. Norway sees its stash as a pension fund. Russia and Iran have stabilisation funds, to counter the volatility of energy prices. China and South Korea want returns—and possibly access to markets, ideas and technology.
Whatever their motives, sovereign-wealth funds are sure to influence prices and markets. Mr Jen expects them to cast their money broadly across industries and economies. Hence they will buy assets priced in Japanese yen and emerging-market currencies; their governments' foreign-exchange reserves tend to be concentrated in dollars and euros. Mr Jen reckons about 40% of the funds' assets will be in dollars, compared with 60% of their countries' reserves. By contrast, he thinks a fifth of the funds' assets will be in yen, against just 2% of reserves.
As they spread their money around the world, sovereign-wealth funds will usually be greeted with open arms. Often, however, they will be treated with suspicion. Already, even as private-equity and hedge funds have retreated in the face of the credit crunch, they are being set up as the next villains of international finance.
For some, the nub of it is that governments are less interested in money than in power. Kevin Hassett of the American Enterprise Institute illustrates the worries by imagining that China bought Citigroup. What if America sought to take sides in a conflict with Taiwan and China and then threatened to shut the bank down? Or, less apocalyptically, suppose that Venezuela bought Alcoa and set about closing its aluminium smelters in the United States in order to move production to Latin America, as part of a strategy for development.
Others are worried for precisely the opposite reason: that the funds are interested chiefly in making money. This would not matter much but for the sheer size that some funds have now attained. They are big enough to shift markets—as the Norwegians and Icelanders discovered. The 21st century's successors to George Soros, who made a killing from sterling's ejection from the European exchange-rate mechanism in 1992, may not be a private fund-manager but the agents of foreign powers.
Yet, for all these imagined fears, it is hard to find examples of sovereign-wealth funds abusing their power. As with private-equity groups and hedge funds, the anxieties owe less to reality than to a mix of secrecy and suspicion. With a few exceptions, like Norway, which opts for disclosure, you cannot tell what a sovereign-wealth fund's objectives are, precisely how much money it manages and where it has made its investments. Already the funds use the full range of investment options, including hedge funds and private equity, which further covers their tracks.
Investing abroad for profit is hard enough: recall Japanese companies' bubble-era forays into Hollywood and New York. Running a business non-commercially is a recipe for huge losses rather than world domination: look at the history of France's Crédit Lyonnais or China's state-owned banks. Criticism of sovereign funds' investments has by no means all come from recipient countries. China's CIC seemed to have scored when it paid $3 billion for a stake in Blackstone, a private-equity group that listed its shares. Today its holding is worth closer to $2 billion and CIC has been lambasted in Beijing.
All this raises the question of who has the upper hand on Wall Street now. Are the investment banks selling cheaply, out of necessity? Or have the sovereign investors been seduced by Wall Street hustlers?
There are benefits on both sides, but maybe the American side is happier. The investment banks are getting much-needed capital. Most likely, their new shareholders will want to stay around for a while—or will find it hard to sell a lot of shares quickly if they do not. And via the new investors, Wall Street may enjoy better access to emerging markets. Certainly, American politicians have been glad enough to see emerging-market governments bail out their banking system—with funds that, Mr Setser impishly points out, have been flowing faster than IMF aid ever did to emerging markets in crisis.
Mutual admiration is not the rule. The first sovereign-wealth fund, the Kuwait Investment Office, created in 1953, ran into trouble in Britain two decades ago. In 1987 it bought more than 20% of British Petroleum, then recently privatised. The British government, headed by Margaret Thatcher, was in no mood to see so much of a national treasure owned by a foreign government—and an oil producer at that. Never mind the free market: the Kuwaitis had to sell more than half their stake.
In the United States more recently, controversy has centred on state-owned companies rather than acquisitive sovereign-wealth funds. The efforts of China National Offshore Oil Corporation to buy Unocal, a Californian oil company, in June 2005 roused opposition. And when DP World, a port operator owned by the government of Dubai, sought to take over P&O's business in America, which included terminals in New York and New Jersey, a huge fuss broke out about Arab ownership of strategic infrastructure.
Elsewhere, sovereign-wealth funds themselves have hit obstacles. In 2006 Singapore's Temasek sparked a row in Thailand by buying the family telecoms business of the then prime minister, Thaksin Shinawatra. Thais disliked Mr Thaksin's use of a loophole to avoid paying tax on the $2 billion his family raised in the sale. But they also objected to Temasek as a buyer, because it is owned by Singapore's government. Temasek has also had trouble in Indonesia, over stakes in two telecoms companies bought by firms majority-owned by Temasek. At the time, Indonesia, smarting from the Asian crisis, was grateful for Singapore's capital. Now that telecoms is thriving again, Temasek seems no longer as welcome. Wall Street's sovereign investors, take note.
Such examples point to the greatest reason for concern about sovereign-wealth funds: although the risk that the funds may abuse companies and markets is theoretical, the danger of financial protectionism is all too real. The idea that secretive foreign governments are up to no good exerts a powerful hold on the collective imagination. Nicolas Sarkozy, the French president, and Angela Merkel, the German chancellor, have both issued warnings. A former American official, speaking on condition of anonymity, says that Washington is even now in a state of “high alert”. He thinks the public debate about sovereign-wealth funds is the prelude to action against them and that the “kindling is dry”.
A broad, politicised hostility to foreign direct investment would come at a high cost. Such investment spreads financial capital, know-how and technology. It helps the world economy adjust to imbalances and gives countries stakes in each other's prosperity. By contrast, as the dispute over DP World showed, conflicts over one investment can rapidly become generalised to others—either directly or through bodies like the Committee on Foreign Investment in the United States, which weighs up the implications of takeovers on national security. That spreads uncertainty, which could even spill over into the trade of goods and services. The European Union, for instance, now wants such a committee of its own.
Even now, suspicion of sovereign-wealth funds comes at a price. The investments in Wall Street have helped to stabilise the banking system, making this an ideal moment for active shareholders to be crawling all over the banks, asking what went wrong in the credit crunch and how to prevent the next. Instead, the banks have taken on large, friendly, long-term shareholders who cannot easily kick up a fuss. If the new investors were to become disgruntled, they may find it costly to sell in a hurry. And most of the funds know that if they cause trouble, people in Washington will soon get to hear about it.
Moreover, a scandal of one sort or another is almost inevitable. With thousands of investments by hundreds of fund managers wielding trillions of dollars, someone, somewhere is going to do something corrupt or foolish. That is why it makes sense to minimise the risk of conflict now.
Last summer Clay Lowery, an American treasury official, proposed that the IMF work on a code of conduct for sovereign-wealth funds. It is devising a scheme to make them more transparent. Shedding light on their strategy and investments should ease suspicion. But transparency alone gets you only so far: it does not, for example, stop abuse or protectionism.
Hence the importance of the OECD, which is looking at how host countries treat sovereign investors. It can draw on existing rules that are already widely accepted. Most countries, for example, limit who can own banks, because governments often guarantee deposits and because confidence in banks underpins the financial system. Similarly, most countries curb ownership of defence technology and utilities. You do not need a handbook of new restrictions. And you do not need to make sovereign-wealth funds a special case: instead, you have clear, predictable rules that apply to everyone.
The hope is that both host countries and sovereign-wealth funds see that their interest lies in building confidence. The hosts stand to benefit from the funds' capital. Meanwhile the funds are ruled by the politics of the places where they invest. You are sovereign only at home; abroad, someone else wields the power.
That is one reason why the managers of sovereign-wealth funds say they want only minority stakes. It is also a reason for them to have modest ambitions. Joshua Aizenman and Reuven Glick, in a note for the Federal Reserve Bank of San Francisco, point out that with such large sums to invest the funds should chiefly aim to keep pace with an index, rather than to invest strategically. Sometimes that will make sense politically, too. The former official advises: “If you want to invest in the US, be boring...Try to look like everyone else.”
Sovereign-wealth funds are large and growing fast. Secretive and possibly manipulative, they are almost designed to raise suspicions. That is why the chief threat they pose is of financial protectionism. And it is why today's grand rescue on Wall Street is likely to lead to a backlash in Washington tomorrow.