Interesting Way To Look At Foreign Funds

Sovereign Wealth Funds
The rise of sovereign wealth funds (SWFs) are an interesting modern day phenomena. Their potential impact on investment markets and on international trade relations has yet to be fully assessed.In the process of thinking about them, I came across an article in the Financial Times this week by Lawrence Summers entitled "Funds That Shake Capitalist Logic".A few relevant excerpts:
For some time now, the large flow of capital from the developing to the industrialized world has been the principal irony of the international financial system. In 2007 this flow will total well over half a trillion dollars, a figure that will be comfortably exceeded by the build-up in reserves and sovereign wealth funds (SWFs) in developing countries. Indeed, Morgan Stanley has estimated on reasonable assumptions that there is now close to $2,500bn (£1,200bn, €1,800bn) in SWFs and that this figure will increase to $5,000bn by 2010 and $12,000bn by 2015.Note the latter number. That is $12 trillion dollars.
… a crucial question for the global financial system and indeed for the global economy is how these funds will be invested.…In the last month we have seen government-controlled Chinese entities take the largest external stake (albeit non-voting) in Blackstone, a big private equity group that, indirectly through its holdings, is one of the largest employers in the U.S.. The government of Qatar is seeking to gain control of J. Sainbury, one of Britain’s largest supermarket chains. Gazprom, a Russian conglomerate in effect controlled by the Kremlin, has strategic interests in the energy sectors of a number of countries and even a stake in Airbus. Entities controlled by the governments of China and Singapore are offering to take a substantial stake in Barclays, giving it more heft in its effort to pull off the world’s largest banking merger, with ABN AMRO. To date most of the official commentary on the issue of SWFs has been framed in terms of traditional arguments about cross-border capital flows. U.S. and UK officials have raised ¬concerns that focus only on the desirability of reciprocity and transparency and on how to treat sectors that trigger national security questions. Others, particularly in ¬continental Europe, have been less positive and have emphasized nationalist considerations about the benefits of local ownership and control.What has received less attention are the particular risks associated with ownership by government-controlled entities, particularly where the ownership stake is taken through direct investments. The logic of the capitalist system depends on shareholders causing companies to act so as to maximize the value of their shares. It is far from obvious that this will over time be the only motivation of governments as shareholders. They may want to see their national companies compete effectively, or to extract technology or to achieve influence. …To the extent that SWFs pursue different approaches from other large pools of capital, the reasons have to be examined. The most plausible reasons – the pursuit of objectives other than maximizing risk-adjusted returns and the ability to use government status to increase returns – are also most suspect from the viewpoint of the global system.I found these excerpts enlightening in that it begins to reveal the strategy that foreign holders of the dollar will certainly use to try and unload some of same, and because Summers correctly points to just some of the problems that will flow from governments jumping wholesale into private enterprise. The implications go far beyond those touched upon, including the inevitable one-sided conflict that will occur when a true private enterprise competitor bumps up against a state owned enterprise either in local markets, or on the international stage. (Pssst… Want that oil concession back in China to get its next permit? Then, perhaps, you should forget about bidding against the Chinese backed SWF for some concession in Nigeria.)I have said it before, and I will say it again… we live in interesting times.