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Sovereign wealth world

A new item has appeared on the list of things for Americans to worry about: so-called sovereign wealth funds controlled by foreign governments. The Financial Page, by James Surowiecki.
Christoph Niemann
/ Source: The New Yorker

Between corrupt mortgage brokers, feckless lenders and risk-happy hedge funds, there’s plenty to keep investors and policymakers up at night. But recently a new item has appeared on the list of things to worry about: so-called sovereign wealth funds, which are investment funds controlled by foreign governments.

While these funds are not new — they first rose to prominence in the seventies, as a way for Arab states to reinvest their oil money — of late they’ve become major players in global markets, thanks to the precipitous rise in oil prices and the booming Chinese economy. China’s new sovereign fund alone has $200 billion to invest, while sovereign wealth funds all together control more than $2.5 trillion — and could control as much as $12 trillion by 2015.

These funds now have the buying power to shape market prices and acquire assets throughout the developed world. Were China’s fund so inclined, it could buy Ford, GM, Volkswagen and Honda, and still have a little money left over for ice cream.

Not surprisingly, Western politicians aren’t thrilled by this prospect. The U.S. recently toughened requirements that any foreign acquisition be vetted by a commission that would assess its impact on national security. Germany has introduced legislation that would permit the government to bar, on national-security grounds, any foreign investment worth twenty-five per cent or more of a company’s value. And some EU commissioners have suggested that stringent regulations on sovereign wealth funds may be in the offing.

What are people so anxious about? The first concern is obvious: No one wants foreign states, especially those which might be anti-Western, acquiring Western companies that have anything to do with national security or advanced technology. But policymakers also believe that having governments play an active role in the stock market and in the global economy might make the whole system less efficient and productive, since government-run companies would likely think about things other than the bottom line, including protecting the interests of their home country.

This situation has put free-marketeers in a peculiar quandary. They usually favor the free flow of capital in the world’s markets, but, in this case, supporting the free flow of capital would mean letting governments run American companies, which no free-market economist thinks is a good idea.

Some of the worries about the dangers posed by sovereign funds are overstated. Many of them are investing in foreign stocks because they’re looking for higher investment returns, which suggests that they will act much like other investors, and focus primarily on the bottom line. And the funds are aware of the tensions their activities have already raised, and they are unlikely to exacerbate matters with aggressive acquisitions. So don’t expect China to try to buy Boeing anytime soon.

More important, even if some foreign governments did end up running companies with an eye toward their own interests, it’s not obvious that that would really matter to the economy as a whole.

If the China Investment Corp., for instance, bought an American toy company and told it to sell only toys made in China, in order to save the Chinese toy industry from its recent bad publicity, the company would quickly lose customers. But its competitors would gain customers, and the system would quickly adjust. Free markets don’t require that everyone try to maximize profits; they just need competition, so that if a company makes bad decisions someone else can come in and take advantage. As long as these government-owned companies face serious competition, they won’t pose a real threat to anyone but their own shareholders.

That doesn’t mean that national-security restrictions on sovereign wealth funds are a bad idea — no one wants China running a U.S. defense contractor. But it does mean that the global economy is robust enough so that these funds are unlikely to shake it. In fact, for all the anxiety about government-run funds corrupting the purity of the free market, the truth is that the global economy is already pretty impure.

In the U.S., after all, public pension funds account for 40 percent of all institutional investment. In Europe, even now, governments own sizable stakes in a number of major corporations, while in many of the most successful Asian economies government and industry have historically worked hand in hand. Almost 80 percent of the oil in the world is pumped by state-owned firms, and, even as China’s economy continues to explode, a large percentage remains state-owned.

The rise of sovereign funds will create plenty of strange situations, like having a foreign government own your local supermarket — the Qatar Investment Authority recently considered buying the British grocer Sainsbury’s.

But it’s not as radical a shift from the current state of things as one might think. Every time you buy gas at a Citgo gas station, after all, you’re doing business with the Venezuelan government, which owns the chain.

The prospect of American companies being sold to foreign states is, to be sure, disconcerting. But it’s a problem of our own making. The reason that sovereign wealth funds are so flush with cash is all the dollars we spend on oil and Asian consumer goods. If we want to consume far beyond our means, then, one way or another we’re going to end up selling off assets to pay for it.

Passing laws barring foreign states from acquiring American companies may help treat the symptom. But it’s not going to do much to cure the disease.