Tuesday, December 18, 2007

Money And Power Head To The Pacific Rim

Balance of power is shifting eastwards

WHAT does the future hold for our household name banks and financial companies?
Look seven to 10 years ahead: will there still be a separately quoted Royal Bank of Scotland, or HBOS or Standard Life? Or might they be instead subsidiaries of Asian financial giants?If 2007 was a year that investors would prefer to forget, 2008 could prove the one they will long remember. It will not be because of economic downturn over the next 12 months – that is now widely discounted. What will make 2008 outstanding is the acceleration of global shift, a step-up in the swing of economic and financial power from West to East and from North to South. The growth outperformance of the economies of China and Asia Pacific has been a longstanding feature of the global landscape for 20 years. But 2008 will see the emergence of Asia Pacific over Europe and America in a way we did not expect. We thought we would lose manufacturing capacity but retain global leadership in banking and finance, but after the events of 2007 this assumption is looking far from sure. Two of the world's leading banks have already had to turn to cash-rich sovereign wealth funds or investors to help them through the global credit squeeze. Barely had Wall Street drawn breath from the announcement that the Abu Dhabi Investment Authority had invested $7.5bn (convertible into equity) in Citibank, America's largest bank, than news came of a $17bn recapitalisation of banking giant UBS in which the Singapore government will take an equity stake of just under 9%. An as yet unnamed Arab investor will take 2%. So much for the complacent belief that while the economies of Asia Pacific continued to outstrip the West in their pace of growth, we would retain dominance in banking and finance. These aren't the first major investments made by sovereign wealth funds. And they will not be the last. Two weeks ago Royal Bank of Scotland was at the centre of talk in the London market of stake-building by such a fund. Sovereign wealth funds, essentially pools of national savings set up for the purposes of long-term investment, have burgeoned from $500bn in the 1990s to as much as $2.5 trillion today. Most of this money is held in China and the city states of the Persian Gulf. The Abu Dhabi Investment Authority alone has $875bn at its disposal, some of it already invested in US Treasury bonds. Saudi Arabia has $300bn, China $300bn and Singapore $330bn.Over the next five years, sovereign funds overall are expected to grow to $15 trillion, with approximately $450bn being added annually. Swelling the coffers of the Middle East states are Opec oil revenues. These are set to hit $650bn this year. That money has to be invested somewhere. Combined, they control trillions of dollars in either wealth funds or foreign reserves.For the past few years, as the dollar has weakened, oil has skyrocketed and Chinese exports have ballooned, those funds have begun to look for places to invest, including Europe and the US. They have until now been stymied by politics. These political objections, and the vetting process the US has erected for overseas purchases of US assets, have melted like snow in the Arabian desert as Wall Street found itself mired in the sub-prime debt debacle and the onset of the credit crunch which has shaken confidence in its biggest banking institutions. For the past five years, financial capitals in America and Europe have been awash with cheap and easily available capital for expansion and acquisition. That position changed dramatically this year. Western capital markets have gone from a position of easy capital availability to the exact opposite, and the downside of being immersed in the global economy – and being a debtor to boot – is that we can't afford the luxury of rejecting foreign buyers.Sovereign wealth funds are now in a plum position, says US economist Zachary Karabell. They have cash and they can cherry-pick in a field that until very recently seemed closed to them. Since September of this year Dubai International Capital has bought a stake in Sony; another investment arm of Abu Dhabi took an 8% stake in the semiconductor company Advanced Micro Devices and a 7.5% stake in the private equity group Carlyle. Citic Securities, a Chinese state bank, took a stake in credit-troubled Bear Stearns. Dubai's stock exchange purchased a major share of both the Nasdaq and the London Stock Exchange. The Chinese government took a stake in the Blackstone group. And last, but certainly not least, another arm of the Dubai government bought the New York fashion emporium Barneys. The longer-term implications may not be reassuring but it is immediately positive in two respects. First, it is a clear sign that global finance is being recycled from countries with capital surplus to countries that are heavily indebted. And second, it is a vote of confidence in the long-term prospects for leading western companies. Some of the deals these funds are pursuing wouldn't be touched by US investors in the current climate of concern and panic. Was this development really out of the blue? Not so, argues former Federal Reserve chairman Alan Greenspan. The root of the current crisis, as he sees it, lies back in the collapse of the Soviet Bloc. Market capitalism quietly but rapidly displaced much of the discredited central planning that was so prevalent in the Third World developing country economies. Since 2000, the real GDP growth of the developing world has been more than double that of the developed world.
This output bore down on inflation and global interest rates, fuelling the surge in mortgage finance and the resulting property asset price bubble that has now spectacularly burst in America and in growing parts of Europe. 2008 will see the global consequences: an epochal shift in financial power as the West looks to the East.What we are likely to see as markets regain some equilibrium in the course of next year and investor confidence returns to the financial sector is a lengthening queue of banks and property companies seeking to replenish their balance sheets through capital-raising on the stock market. The share registers of big banking companies such as Barclays and RBS are already becoming internationalised. But capital replenishment is set to accelerate this process significantly. As more equity ownership shifts to the economies of Asia Pacific, can control be far behind?

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