June 28, 2008
A force for good?
They are 'not out to make a quick buck'
SWFs - 'Saviour wealth funds'?
This may be a better name for sovereign wealth funds (SWFs), argues the European Union's trade commissioner Peter Mandelson.
His comments were made this month during trips to Abu Dhabi and other Gulf countries for free- trade-agreement discussions.
The positive sentiment about SWFs marks the growing chorus of support for them as benign benefactors, who should be welcomed by governments rather than feared.
Indeed, even those who voiced suspicions against SWFs last year have largely changed their tune now.
The finance ministers from the Group of Eight (G-8) rich nations, who feared that SWFs' rise signalled the onset of 'investment protectionism' some 10 months ago, have acknowledged the positive side of SWFs.
Earlier this month, the G-8 conceded: 'We recognise the benefits of commercially driven investment from government-controlled investors such as SWFs.'
Investment guru Warren Buffett weighed in even more strongly in favour of SWFs.
In his March annual letter to shareholders, he roundly trashed the conspiracy theories indicting SWFs' recent investments in big banks as part of 'some nefarious plot by foreign governments'.
If anyone were to blame, it would be the United States itself, he insisted.
'This is our doing. Our trade equation guarantees massive foreign investments in the US.
'When we force-feed US$2 billion (S$2.73 billion) daily to the rest of the world, they must invest in something here. Why should we complain when they choose stocks over bonds?' he argued.
Indeed, Mr Buffett pointed out that the key agenda of SWFs is more sensible than sinister - how to eke out satisfactory returns.
SWFs have no time to entertain pipe dreams of taking over the world - 'They already have their hands full trying to do a good job, to answer to their citizen shareholders at home,' an executive from an Asian SWF said, on condition of anonymity.
Hence, SWFs, including Singapore's funds, are diversifying outside their own home markets in search of a 'better risk-return benefit', explained Harvard Business School professor Robert Merton in an interview last year.
They need 'to preserve assets for future generations'.
Because SWFs are seeking long-term returns, another compelling argument is they are not out to make a quick buck like other investors.
China's Finance Minister Xie Xuren pointed out that SWFs can act as a balance to the short-term bets made by other investors.
'SWFs' investments are generally long-term, not speculative, so they are beneficial to the growth of investment and the economy,' Mr Xie said on June 17 on the sidelines of the US-China strategic economic dialogue talks.
Still, why go as far as to revere SWFs like China Investment Corporation (CIC) and Temasek Holdings as financial saviours?
Because they were willing to provide a lifeline at very short notice, by injecting much-needed capital into embattled banks, while other investors were fleeing in horror.
SWFs can afford to do so because they can wait for years until these companies recover. Government of Singapore Investment Corporation chairman Lee Kuan Yew declared in a Bloomberg TV interview on April 29 that the fund can hold some investments for two or three decades.
SWFs can 'stand the market volatility well into the long run', since their funds are stable and managed by investment professionals, noted Assistant Professor Yothin Jinjarak at Nanyang Technological University. This makes SWFs uniquely positioned to be stabilising forces amid the current financial turbulence, said the economics lecturer.
And now that SWFs have bought into Western assets, there is even less reason to fear them becoming renegades. After all, they have the same vested interests in ensuring that the global financial system remains stable.
Many SWFs hail from Asia and the Middle East, whose breakneck growth has been partly due to massive exports to the US and Europe.
Imagine a nightmare scenario where the SWFs did not inject capital into Wall Street.
Market confidence hits rock bottom. Liquidity in the financial system dries up. The US recession may well be worse than it is now.
'It is difficult to think of how much worse off we (the US) would be in the current financial crisis without SWFs,' wrote Mr Stephen Schwarzman, chairman of US private equity firm Blackstone, in a Financial Times commentary on June 19.
A recession in the US and Europe would hurt developing countries' growth, so SWFs from Asia and the Middle East have an added incentive to ensure the global economy remains stable - to protect their own economies.
SWF investments can also be good for the Western companies involved, said Shanghai-based economics analyst Jin Zhao.
Take Barclays, for example. Temasek Holdings and China Development Bank (CDB) - in which CIC holds a stake - helped to sweeten the British bank's bid for rival bank ABN Amro last year, by investing in Barclays.
Even after the bid fell through, Barclays was still the winner, having sealed a lucrative five-year deal to become the Chinese government's preferred provider of commodity-market risk hedging.
Indeed, companies looking for access to overseas markets like China may get a golden ticket from the SWFs which invest in them,' said Ms Jin.
While other companies, until recently, took the long road of forming joint ventures or buying stakes in Chinese companies, those with SWF investors may get a short cut.
Blackstone is enjoying access to plum investment advisory roles in China thanks to CIC, which bought a stake of just under 10 per cent in the US investment group.
It has been roped in to advise Chinalco on the latter's role in a merger between Rio Tinto and BHP Billiton to become the world's largest mining company. Chinalco bought a 9 per cent stake in Rio Tinto in January.
And it is not just financial players who sing praises of SWF involvement.
High-fashion US retailer Barneys New York is said to have become an even more premium brand after US$940 million of petrodollars sloshed through its portals from Istithmar, a Dubai SWF, a year ago.
SWFs have won over many critics, after bringing stability and liquidity to the global capital markets.
All these have prompted Mr William Miracky, a Monitor Group senior partner and former Federal Reserve economist, to declare: 'On balance, SWFs are good.' >
A force for evil?
SWFs 'can be a threat to national security'
By Grace Ng
SWFs - danger ahead?
Sovereign wealth funds may have been behaving themselves so far, but do not be fooled, warn political analysts like Mr Alan Tonelson.
'SWF enthusiasts, who eagerly note that the funds so far have provided no concrete cause for concern, are tantamount to teenagers who have begun to start driving under the influence (of alcohol), and brag that they're still alive,' he said.
He was red-flagging the rogue potential of SWFs at the United States-China Economic and Security Review Commission Hearing that discussed the implications of SWFs for national security in February.
'The government must provide the adult supervision,' he urged.
Mr Tonelson is not alone in his mistrust of SWFs and fear that they could 'threaten national security' through their investments in US assets.
In February, 55 per cent of Americans polled by Public Strategies, a US consulting firm, thought investments by foreign governments harmed US national security. Only 10 per cent disagreed.
The poll findings also showed that 'opposition was particularly pronounced to investments in high-tech or financial firms, and to investments by SWFs headquartered in the Middle East or East Asia', noted professor of international politics Daniel Drezner from the Fletcher School of Law and Diplomacy at Tufts University.
Common fears are that SWFs could seek to transfer know-how and technology in Western banks and high-technology companies to their home country, noted Morgan Stanley analyst Stephen Jen.
In other words, SWFs may practise 'state capitalism'.
Dr Gerard Lyons, Standard Chartered chief economist and group head of global research, coined this phrase to describe the 'use of government-controlled funds to acquire strategic stakes around the world'.
Mr Tonelson also speculated that SWFs' control over US assets may give them more diplomatic negotiating power over Washington.
He posed this question: If the financial turmoil persists, would Washington dare to stand up to Beijing if a cross-strait crisis erupted?
After all, the Chinese government holds big stakes in some big American financial institutions, he pointed out.
US Senator Barney Frank was more circumspect: it depends on which country the SWF comes from, he argued.
'I have been asked from time to time what I think about sovereign wealth funds. To some extent, that is like asking me what I think about countries,' he told a US hearing on foreign state investment in the US economy in March.
'Some I like a lot, some not so much. The fact is, sovereign wealth funds are reflections of their countries; some are fine and some make me nervous.'
While he did not name names, other politicians have been more explicit about which countries' SWFs they fear more than others.
Mr Charlie McCreevy, the European Commission single-market commissioner, for one, feels no love from Russia. Likening Russia's state-owned gas monopoly Gazprom to an SWF, he darkly speculated about a new age of industrial espionage, unless funds like those in Russia were handcuffed by rules.
But a more immediate concern is the impact of SWFs' massive financial firepower on the stability of the financial system.
Quintain chairman John Plender highlighted the 'threat these flows pose to high corporate governance standards in the developed world'. He wrote in the Financial Times in January that if SWFs move a lot more money into equities, this may artificially lower the cost of capital.
This may mean that companies that are more lax in their corporate governance standards may still be able to get funding from SWFs, instead of being punished by the market for their sloppiness.
SWFs also contribute to soaring prices of assets and commodities, others charge.
Institutional investors, including SWFs, have been pouring more money into oil and other commodities to hedge against inflation and secure supplies. This may have helped to drive up prices, said analysts like Mr Larry Goldstein, director of the Energy Policy Research Foundation.
On a broader scale, the concern about SWFs reflects a growing uneasiness in the West about the rising power of emerging economies such as China, Russia, India and the Middle East.
The richest SWFs come from developing countries that are fast replacing the rich nations as the powerhouses of the global economy, supplying them with everything from oil to commodities to cheap underwear.
As research consultant Monitor Group puts it: 'There is nervousness about the rise of nations outside the 'club' that has dominated international finance since World War II and the potential corresponding loss of power and influence.'
Indeed, the Group of Eight rich countries met in Germany last September and issued a strident call against 'investment protectionism'.
Others have railed against how prosperous Asian countries like China and Middle Eastern oil producers are using the West's money to take over the West's assets.
They point out that the West had outsourced a lot of production to the developing countries. The latter then sell the cheap goods back to the West and amass trillions of foreign currency reserves. Meanwhile, the oil producers are also getting jetloads of US dollars for barrels of black juice.
Even investment whiz Warren Buffett, an SWF supporter, has been losing sleep over this phenomenon since 2005. He painted the worst-case scenario: the US could end up with a 'sharecropper economy' where Americans largely slog for foreign-owned firms.
This is because the US has to 'give away a little part of the country' each year, as long as it is saddled with massive foreign trade deficits, he said in a letter to shareholders of Berkshire-Hathaway, which he heads.
Perhaps SWFs should resign themselves to the reality that mistrust about their motives will never go away.
This is because of the history of 'misunderstandings, complexity, and obscurity involved' with SWFs, said Mr Knut Kjaer, ex-CEO of Norges Bank Investment Management, Norway's SWF.
'What is true is that there is always a price to be paid for growth, and the fact is that the world relies on financial foundations different from the old model of unipolar American power,' he wrote in an article published in the Financial Times in April.
Still, the balance of power from the West to the Middle East and Asia may not shift drastically yet.
'These new forces of capitalism may finance the leaders of the next century, but they are unlikely to topple them,' said Mr Kjaer.
A force for good?
They are 'not out to make a quick buck'
SWFs - 'Saviour wealth funds'?
This may be a better name for sovereign wealth funds (SWFs), argues the European Union's trade commissioner Peter Mandelson.
His comments were made this month during trips to Abu Dhabi and other Gulf countries for free- trade-agreement discussions.
The positive sentiment about SWFs marks the growing chorus of support for them as benign benefactors, who should be welcomed by governments rather than feared.
Indeed, even those who voiced suspicions against SWFs last year have largely changed their tune now.
The finance ministers from the Group of Eight (G-8) rich nations, who feared that SWFs' rise signalled the onset of 'investment protectionism' some 10 months ago, have acknowledged the positive side of SWFs.
Earlier this month, the G-8 conceded: 'We recognise the benefits of commercially driven investment from government-controlled investors such as SWFs.'
Investment guru Warren Buffett weighed in even more strongly in favour of SWFs.
In his March annual letter to shareholders, he roundly trashed the conspiracy theories indicting SWFs' recent investments in big banks as part of 'some nefarious plot by foreign governments'.
If anyone were to blame, it would be the United States itself, he insisted.
'This is our doing. Our trade equation guarantees massive foreign investments in the US.
'When we force-feed US$2 billion (S$2.73 billion) daily to the rest of the world, they must invest in something here. Why should we complain when they choose stocks over bonds?' he argued.
Indeed, Mr Buffett pointed out that the key agenda of SWFs is more sensible than sinister - how to eke out satisfactory returns.
SWFs have no time to entertain pipe dreams of taking over the world - 'They already have their hands full trying to do a good job, to answer to their citizen shareholders at home,' an executive from an Asian SWF said, on condition of anonymity.
Hence, SWFs, including Singapore's funds, are diversifying outside their own home markets in search of a 'better risk-return benefit', explained Harvard Business School professor Robert Merton in an interview last year.
They need 'to preserve assets for future generations'.
Because SWFs are seeking long-term returns, another compelling argument is they are not out to make a quick buck like other investors.
China's Finance Minister Xie Xuren pointed out that SWFs can act as a balance to the short-term bets made by other investors.
'SWFs' investments are generally long-term, not speculative, so they are beneficial to the growth of investment and the economy,' Mr Xie said on June 17 on the sidelines of the US-China strategic economic dialogue talks.
Still, why go as far as to revere SWFs like China Investment Corporation (CIC) and Temasek Holdings as financial saviours?
Because they were willing to provide a lifeline at very short notice, by injecting much-needed capital into embattled banks, while other investors were fleeing in horror.
SWFs can afford to do so because they can wait for years until these companies recover. Government of Singapore Investment Corporation chairman Lee Kuan Yew declared in a Bloomberg TV interview on April 29 that the fund can hold some investments for two or three decades.
SWFs can 'stand the market volatility well into the long run', since their funds are stable and managed by investment professionals, noted Assistant Professor Yothin Jinjarak at Nanyang Technological University. This makes SWFs uniquely positioned to be stabilising forces amid the current financial turbulence, said the economics lecturer.
And now that SWFs have bought into Western assets, there is even less reason to fear them becoming renegades. After all, they have the same vested interests in ensuring that the global financial system remains stable.
Many SWFs hail from Asia and the Middle East, whose breakneck growth has been partly due to massive exports to the US and Europe.
Imagine a nightmare scenario where the SWFs did not inject capital into Wall Street.
Market confidence hits rock bottom. Liquidity in the financial system dries up. The US recession may well be worse than it is now.
'It is difficult to think of how much worse off we (the US) would be in the current financial crisis without SWFs,' wrote Mr Stephen Schwarzman, chairman of US private equity firm Blackstone, in a Financial Times commentary on June 19.
A recession in the US and Europe would hurt developing countries' growth, so SWFs from Asia and the Middle East have an added incentive to ensure the global economy remains stable - to protect their own economies.
SWF investments can also be good for the Western companies involved, said Shanghai-based economics analyst Jin Zhao.
Take Barclays, for example. Temasek Holdings and China Development Bank (CDB) - in which CIC holds a stake - helped to sweeten the British bank's bid for rival bank ABN Amro last year, by investing in Barclays.
Even after the bid fell through, Barclays was still the winner, having sealed a lucrative five-year deal to become the Chinese government's preferred provider of commodity-market risk hedging.
Indeed, companies looking for access to overseas markets like China may get a golden ticket from the SWFs which invest in them,' said Ms Jin.
While other companies, until recently, took the long road of forming joint ventures or buying stakes in Chinese companies, those with SWF investors may get a short cut.
Blackstone is enjoying access to plum investment advisory roles in China thanks to CIC, which bought a stake of just under 10 per cent in the US investment group.
It has been roped in to advise Chinalco on the latter's role in a merger between Rio Tinto and BHP Billiton to become the world's largest mining company. Chinalco bought a 9 per cent stake in Rio Tinto in January.
And it is not just financial players who sing praises of SWF involvement.
High-fashion US retailer Barneys New York is said to have become an even more premium brand after US$940 million of petrodollars sloshed through its portals from Istithmar, a Dubai SWF, a year ago.
SWFs have won over many critics, after bringing stability and liquidity to the global capital markets.
All these have prompted Mr William Miracky, a Monitor Group senior partner and former Federal Reserve economist, to declare: 'On balance, SWFs are good.' >
A force for evil?
SWFs 'can be a threat to national security'
By Grace Ng
SWFs - danger ahead?
Sovereign wealth funds may have been behaving themselves so far, but do not be fooled, warn political analysts like Mr Alan Tonelson.
'SWF enthusiasts, who eagerly note that the funds so far have provided no concrete cause for concern, are tantamount to teenagers who have begun to start driving under the influence (of alcohol), and brag that they're still alive,' he said.
He was red-flagging the rogue potential of SWFs at the United States-China Economic and Security Review Commission Hearing that discussed the implications of SWFs for national security in February.
'The government must provide the adult supervision,' he urged.
Mr Tonelson is not alone in his mistrust of SWFs and fear that they could 'threaten national security' through their investments in US assets.
In February, 55 per cent of Americans polled by Public Strategies, a US consulting firm, thought investments by foreign governments harmed US national security. Only 10 per cent disagreed.
The poll findings also showed that 'opposition was particularly pronounced to investments in high-tech or financial firms, and to investments by SWFs headquartered in the Middle East or East Asia', noted professor of international politics Daniel Drezner from the Fletcher School of Law and Diplomacy at Tufts University.
Common fears are that SWFs could seek to transfer know-how and technology in Western banks and high-technology companies to their home country, noted Morgan Stanley analyst Stephen Jen.
In other words, SWFs may practise 'state capitalism'.
Dr Gerard Lyons, Standard Chartered chief economist and group head of global research, coined this phrase to describe the 'use of government-controlled funds to acquire strategic stakes around the world'.
Mr Tonelson also speculated that SWFs' control over US assets may give them more diplomatic negotiating power over Washington.
He posed this question: If the financial turmoil persists, would Washington dare to stand up to Beijing if a cross-strait crisis erupted?
After all, the Chinese government holds big stakes in some big American financial institutions, he pointed out.
US Senator Barney Frank was more circumspect: it depends on which country the SWF comes from, he argued.
'I have been asked from time to time what I think about sovereign wealth funds. To some extent, that is like asking me what I think about countries,' he told a US hearing on foreign state investment in the US economy in March.
'Some I like a lot, some not so much. The fact is, sovereign wealth funds are reflections of their countries; some are fine and some make me nervous.'
While he did not name names, other politicians have been more explicit about which countries' SWFs they fear more than others.
Mr Charlie McCreevy, the European Commission single-market commissioner, for one, feels no love from Russia. Likening Russia's state-owned gas monopoly Gazprom to an SWF, he darkly speculated about a new age of industrial espionage, unless funds like those in Russia were handcuffed by rules.
But a more immediate concern is the impact of SWFs' massive financial firepower on the stability of the financial system.
Quintain chairman John Plender highlighted the 'threat these flows pose to high corporate governance standards in the developed world'. He wrote in the Financial Times in January that if SWFs move a lot more money into equities, this may artificially lower the cost of capital.
This may mean that companies that are more lax in their corporate governance standards may still be able to get funding from SWFs, instead of being punished by the market for their sloppiness.
SWFs also contribute to soaring prices of assets and commodities, others charge.
Institutional investors, including SWFs, have been pouring more money into oil and other commodities to hedge against inflation and secure supplies. This may have helped to drive up prices, said analysts like Mr Larry Goldstein, director of the Energy Policy Research Foundation.
On a broader scale, the concern about SWFs reflects a growing uneasiness in the West about the rising power of emerging economies such as China, Russia, India and the Middle East.
The richest SWFs come from developing countries that are fast replacing the rich nations as the powerhouses of the global economy, supplying them with everything from oil to commodities to cheap underwear.
As research consultant Monitor Group puts it: 'There is nervousness about the rise of nations outside the 'club' that has dominated international finance since World War II and the potential corresponding loss of power and influence.'
Indeed, the Group of Eight rich countries met in Germany last September and issued a strident call against 'investment protectionism'.
Others have railed against how prosperous Asian countries like China and Middle Eastern oil producers are using the West's money to take over the West's assets.
They point out that the West had outsourced a lot of production to the developing countries. The latter then sell the cheap goods back to the West and amass trillions of foreign currency reserves. Meanwhile, the oil producers are also getting jetloads of US dollars for barrels of black juice.
Even investment whiz Warren Buffett, an SWF supporter, has been losing sleep over this phenomenon since 2005. He painted the worst-case scenario: the US could end up with a 'sharecropper economy' where Americans largely slog for foreign-owned firms.
This is because the US has to 'give away a little part of the country' each year, as long as it is saddled with massive foreign trade deficits, he said in a letter to shareholders of Berkshire-Hathaway, which he heads.
Perhaps SWFs should resign themselves to the reality that mistrust about their motives will never go away.
This is because of the history of 'misunderstandings, complexity, and obscurity involved' with SWFs, said Mr Knut Kjaer, ex-CEO of Norges Bank Investment Management, Norway's SWF.
'What is true is that there is always a price to be paid for growth, and the fact is that the world relies on financial foundations different from the old model of unipolar American power,' he wrote in an article published in the Financial Times in April.
Still, the balance of power from the West to the Middle East and Asia may not shift drastically yet.
'These new forces of capitalism may finance the leaders of the next century, but they are unlikely to topple them,' said Mr Kjaer.
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