Sovereign wealth funds: Altering global equations

Official reserves held by some governments are significantly large and there is pressure on them to earn more than in the traditional mode of investing in US treasury bills.

China stunned the world in May by investing $3 billion in the initial public offering of the largest private equity fund Blackstone. Socialism of a Chinese kind!

The total funds at the disposal of sovereign wealth funds (SWFs) are estimated at around $2.5 trillion.

More than 20 countries are actively managing their sovereign wealth – among others, China, Singapore (whose Temasek Holdings has always been active), UAE, Norway, Russia, Malaysia and Taiwan.

There are four major issues relating to SWF, the new kid around the global financial block.

The first is about the concerns of recipient nations. For instance, a part of Barclays bank is going to be part-owned by China and the oldest super market in Britain, Sainsbury, is getting acquired by Qatar.

Some experts argue against the ‘strategic’ or ‘sensitive sectors’ getting acquired by other sovereign funds.

According to them, this might undermine the concept of ‘nation state’, which has been the basis of the global scheme since the Treaty of Westphalia in 1648.

When Japanese private companies acquired real estate and huge complexes in the nineties in the USA, similar concerns were expressed. Thus, the opposition to government funds might just get stronger.

But, most of the governments have adequate powers to regulate or bar acquisition of the ‘sensitive’ assets directly by SWFs of other countries.

But, the acquisition could be done in an indirect fashion, like say a China fund acquiring a stake in an American fund, which has control in a London fund, which in turn acquires a part of say SBI using its funds.

That would put to test the ability of regulators in the recipient territories to use ‘know your investor’ norms effectively.

The equally important issue is the capability of many of the countries to manage their SWFs in a professional fashion.

The recent example of the pension fund in Greece acquiring exotic derivative products from J P Morgan and the scandal associated with that led to the resignation of ministers.

There is a lot of what is called “mis-selling” in financial parlance in the international markets, and many of the fund managers of these sovereign funds may not fully understand the intricacies of the products offered/ sold.

Plus, the other issue of venality and corruption, which afflicts the financial dealings of some of the government financial agencies can also impact decision making in this regard.

Even domestic funds are sometimes invested inappropriately or misused, as seen recently in the Shanghai pension fund wherein the head was sacked and in the loss of millions of records of the social security fund in Japan.

The other issue is pertaining to transparency and availability of credible audited information regarding the functioning of many of these funds.

For instance, the Singapore State Investment Company has faced a lot of flak and questions on its transparency. Recently, it faced a backlash in Thailand over its acquisition of a telecommunication company.

When the transactions of SWFs are shrouded in mystery, there are issues of balancing between discreetness and transparency.

Since these are government controlled funds, it is all the more important that they present their audited transactions for global scrutiny.

In the absence of such transparency, there is always a possibility of political backlash. It is also important to note that the change of government in one country can create more issues for these SWFs if they have not acted in a transparent manner.

There is another important dimension to this debate on SWFs. Majority of these funds are from countries in Asia and Middle East, besides Russia. Indeed, Norway is the only European country in the list of top 20 SWFs. There could be a protectionist trend from Europe and the new French President has openly declared that “protectionism” was not a word to be shunned in the context of trade and investment.

The same ‘protectionist’ tendency could be on show in the US, which is in the throes of the election fever. Hence, there is a likelihood of such funds heading for India. Already, our markets are wrecked by the vicissitudes of global financial developments like changing interest rates in Japan or failing mortgage loans in the USA, or falling housing prices in the UK.

Such fluctuations could rise with the entry of these funds, since the reasons of their entry and exit may never be known. Whoever said, predicting is very difficult, and more so if it pertains to the future?


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