Asia Times Online ::A blow for Asian wealth funds

A blow for Asian wealth funds
By Julio Godoy

BERLIN - Germany's decision to introduce controls on investments from sovereign wealth funds (SWFs) in strategic domestic sectors is an indicator of growing protectionism in European and other industrialized countries against the neo-liberal globalization they once masterminded.

The German government announced on April 9 it was introducing controls on investments by SWFs, investment funds managed by oil-rich Arab states and other rapidly developing countries such as China, Singapore and India. A SWF is a state-owned fund that


invests capital comprising financial assets such as stocks, bonds, property or other financial instruments.

The German Ministry for Labor can now stop any major venture in local firms, especially in public services, if such investments threaten local jobs or if they are sought in strategic sectors such as electricity generation, a government spokesperson said at a press conference in Berlin.

Automatic controls will kick in if non-European Union investors want more than a 25% stake, the spokesperson added. The government can refuse any investment in what it considers strategic sectors, or when the venture is seen to threaten national security.

If the SWF does not report its stake, the government can force it to resell its shares.

The decision follows fears that the SWFs will take control of strategic sectors. In France, the possibility that the China Investment Corporation, a state investment fund, and other Arab funds, could take up to 10% of the private oil company Total, has launched a debate on the need to establish controls against such ventures.

The company's chief executive officer, Christophe de Margerie, has tried to defend the investments. "We were the ones who went searching for Chinese investment," de Margerie told the Paris newspaper Libération. He emphasized that Total had asked the Chinese fund not to invest beyond 3% of the company's capital.

De Margerie said that during the 1980s, the Abu Dhabi Investment Authority (Adia) funds, owned by the United Arab Emirates, controlled up to 9% of Total's capital, but then "nobody was paying attention".





Until the global financial crisis broke out in the US in the summer of 2007, provoked by the collapse of the real estate market and the highly speculative financial instruments associated with subprime mortgages, few were paying attention to SWFs. Recent high-profile investments made by SWFs, especially in US banks in need of fresh liquidity, have put them in the spotlight.

"Today it has become fashionable to question the SWFs," de Margerie said. But "these funds are not trying to control our companies and societies. They say so, and I believe them."

Not everybody believes this. Christian Chavagneux, editor of the French monthly Alternatives Economiques, says massive investments by the SWFs can endanger a company if the funds disinvest as suddenly and as massively as they poured money into the firm.

"Last November, the Singaporean fund Temasek did sell a tenth of its shares of the Bank of China, thus sending the market price of the bank's shares down the pipes," Chavagneux told Inter Press Service. "You can imagine what can happen if a similar disinvestment takes place suddenly in one of the battered banks in the US or Germany."

"We can also imagine that the states controlling these sovereign funds could be tempted to use their financial leverage as a foreign policy weapon, or to use Western companies as a learning field for their young leaders. Of course, these are all speculations."

Similar speculation is being aired in many of the industrialized world's capitals, and has moved the Paris-based Organization for Economic Cooperation and Development (OECD) to issue a warning urging SWFs to observe "high standards of transparency and governance" to avoid further protectionist measures in the industrialized world.

The OECD represents the 30 most industrialized countries, from the US, most EU members, to Australia, Japan and South Korea, and also Mexico.

In an oblique warning, OECD director general Angel Gurría wrote to the finance ministries of the group of seven most industrialized countries (G7) on April 9 that "observance of high standards of transparency and governance [by SWFs] will help recipient countries implement their commitments and recommendations for preserving open markets while safeguarding national security".

The letter says the OECD countries will "remain committed to keeping their investment frontiers open to sovereign wealth funds as long as these funds invest for commercial, not political, ends".

OECD members have agreed to base their investment policies on SWFs on existing instruments that call for fair treatment of investors. But these investment instruments also recognize the right of member countries to take action to protect their national security.

In another statement on April 9, the OECD pointed out that "investments by SWFs can raise concerns as to whether their objectives are commercial or driven by political, defense or foreign policy considerations".

Although more than 20 countries have these funds, Simon Johnson, economic counselor and director of the International Monetary Fund's research department, says they "remain quite concentrated, with the top five funds accounting for about 70% of total assets".

But the concern in the OECD countries arises from the main funds' home countries: seven of the 10 largest funds belong to Algeria, China, Kuwait, Libya, Qatar, Saudi Arabia and the United Arab Emirates.

According to some estimates, global SWF investments added to about $48 billion in 2007, a 165% increase over 2006. The SWFs' total assets were around $3.3 trillion in 2007, an 18% increase over the previous year.

When other assets owned by the SWFs' home countries are included, such as pension funds and their share of their own public services, their total assets in 2007 came to $14.5 trillion . The US gross domestic product in 2007 was $12 trillion.

(Inter Press Service)