Public giants in private markets
Countries like China, awash in export cash, are buying into Wall Street. Do such investments have strings?
Americans wouldn't want their government owning chunks of Wall Street. Then why is it OK for governments from China to the Middle East to do so? The question needs an answer fast. Many rich governments are on a buying spree, and credit-starved Wall Street firms need cash.
The mortgage crisis of 2007 has hit US financial companies hard. The latest firm to seek a foreign-government rescue is Morgan Stanley. On Dec. 18, it gave a 10 percent stake to a newly created arm of the Chinese government, China Investment Corp., which invested $5 billion in the firm.
Last month, Citigroup raised $7.5 billion from the Abu Dhabi Investment Authority, giving the Arab Gulf sheikdom a 4.9 percent stake in the largest US bank.
Watch for more such cash infusions in private firms from so-called "sovereign wealth funds," or government investment entities. These funds go beyond the usual investments in US Treasury bonds or similar securities. Nearly 30 countries now have them, and they command about $3 trillion – yes, trillion – in assets. They may soon reach $12 trillion, or about the same value as all the companies in the S&P 500. That's a chunk of change the world's market can use, if invested wisely.
Beijing only recently decided to seek overseas investments for its $1.4 trillion in foreign currency reserves from exports. And OPEC governments that control their countries' petroleum are rolling in export dollars as oil prices near $100 a barrel.
But are such investments merely for long-term profits, with no chance that political strings will be pulled? Or might China, Abu Dhabi, and other countries use this financial grip for diplomatic gain or to damage US national security?
Christopher Cox, chairman of the US Securities and Exchange Commission, warns that governments behind these funds could use their spy agencies to illegally collect insider-information on companies.
One lesson lies in Venezuela's manipulation of its US investments. The anti-US leader Hugo Chávez uses his government's ownership of Houston-based oil company Citgo to polish his image in the US. Citgo provides a 40 percent discount in heating oil to a Massachusetts nonprofit to distribute to low-income Americans. The deal was arranged with the help of a US congressman, who has praised Mr. Chávez.
But are such political uses of investments really much different than campaigns to have US companies divest from targeted countries such as apartheid-era South Africa, Sudan, Cuba, or Israel? Government manipulation of any investment can cut both ways.
Public fears of sovereign wealth funds might lead to harmful protectionist barriers. That's why the G-7 group of industrialized nations recently organized a global effort to set voluntary standards for the operation of these funds – to help keep them transparent and accountable in their dealings. Such standards also need to ensure that the funds don't compete unfairly in markets with private investments.
No doubt these funds need closer scrutiny. But they do serve a purpose in recycling wealth to create more wealth. Done for that sole purpose, they're a welcome market player.