European policy makers are considering imposing controls on state-owned funds that take stakes in flagship European companies. The deliberations that have kicked off in recent weeks are a reaction to the uncertain political intentions of China and Russia as they start investing vast new reservoirs of cash in Western markets.So-called "sovereign wealth funds" have taken off recently as a way for emerging-market countries to earn higher returns on excess reserves, rather than squirreling them away in the usual low-yielding government securities.
Whether backed by China's $1.2 trillion in currency reserves, or the profits that are accruing in places like Russia and the United Arab Emirates from energy sales, such funds are posing a dilemma even for politicians with strong records of supporting foreign investment: Do the state-controlled investors simply want to make money, or might they be seeking political influence as well?
"With those sovereign funds we now have a new and completely unknown elements in circulation," the Chancellor Angela Merkel of Germany said recently. "One cannot simply react as if these are completely normal funds of privately pooled capital."
The German government has taken the lead in Europe, with officials hoping to hash out a plan of action by the end of this year.
France is supporting the German initiative, which could lead to restrictions, or at least careful reviews, of moves made by the varying types of state-controlled investors that have sprung up in the last few years.
"I find that our German friends are totally right to do this," said Jean-Pierre Jouyet, the French European affairs minister. "We have to be better organized on the European level to defend our interests."
This week, Charlie McCreevey, the European Union's commissioner for the internal market, directed his senior officials to mount a similar exercise - although with no specific mandate. Other members of the commission, including Peter Mandelson, who handles trade policy, are also following the issue, EU officials said.
"We are trying to avoid coming at this with easy, early shots," said Oliver Drewes, McCreevey's spokesman. "But it is an important enough development, a new one on the European agenda, that the European Commission needs to take a look."
The political attention the funds are drawing in Europe raises what for some are troubling questions about whether the exercise is a veiled form of protectionism. Even with the best of intentions, scrutinizing financial flows could antagonize major trading partners, like China, and squeeze the investment that Europe will need in the future.
"The most serious question is how we do this without creating a new kind of protectionism," said Elmar Brok, a German conservative who sits in the European Parliament. "As exporting countries we cannot afford that at all..."
...the emergence of much larger players - most notably China and Russia - have drawn new attention. These new pools of wealth, fed by sales of natural resources and growing currency reserves, can operate in different forms. But what they have in common is that they are ultimately controlled by governments rather than private investors.
Stephen Jen, global head of currency research at Morgan Stanley, has estimated that emerging market countries now have about $1.5 trillion in excess reserves to invest.
China above all set the tone when it announced plans in March to invest some of its $1.2 trillion in reserves in higher-yielding assets than the U.S. government securities it owns now. In May, it took a $3 billion, nonvoting stake in Blackstone, the U.S. private equity giant that has been active in Europe as well.
Likewise, Russia announced that it would invest a portion of its $357 billion of official reserves, designated the Future Generations Fund, creating a fund of $30 billion. That could grow by $40 billion a year from oil and natural gas exports.
A wake-up call for Germany came after Russia took a 5 percent stake in European Aeronautics Defense & Space, the parent of aircraft manufacturer Airbus, through a state bank last year. German officials said that triggered their current deliberations.
When DaimlerChrysler, the main German EADS shareholder, later sold 7.5 percent of the company, it was transferred to a consortium of German banks rather than being sold on the open market, where Russia could have seized the opportunity to raise its stake.
Russia, whose push for a board seat at EADS was rebuffed, said this week that it was now considering selling its stake.
What unsettles European leaders the most is that the intentions of the funds are murky - and assuming the worst could provoke disputes with Moscow and Beijing.
"Are they run on professional or political criteria?" said Joaquín Almunia, the European commissioner for economic and monetary affairs. "I would also like to know where a fund is investing and why," he added, but "this creates political problems."
Virtually every West European country has mechanisms in place to review outside investments on national security grounds, though the scope of that authority, and the political influence involved, can vary. Britain tries to keep politics out of the picture by having independent agencies conduct the reviews, while France has issued a list of protected sectors, ranging from biotechnology needed to fight terrorism to casinos that might launder money.
The Germans are grappling with how to define what funds would fall under scrutiny, how to regulate their investments - if at all - and whether EU rules would be affected, according to a German official. Peer Steinbrück, the German finance minister, has said that the German inquiry is examining sectors including banking, postal services, telecommunications, logistics and energy, with an eye toward not harming normal capital flows.
"We want to take care that we look at the totality of the factors in the financial markets," said Gerhard Cromme, the chairman of engineering giant Siemens and an informal adviser to the German government on the subject.
Given that the reviews in Berlin and Brussels focus heavily on Russia and China, much will depend on whether European leaders choose to see potentially malign intentions among those investors. The evidence to date cuts both ways, analysts said.
When it has undertaken other investments, like the Blackstone deal, and a much smaller pension fund, it has worked through third parties, and Beijing's orders have been identical to those of any commercial investor: get a good return.
Yet other Chinese investments, notably in Africa, illustrate more national interest, one EU official pointed out. There, with a mixture of foreign aid, high-profile visits and investment, China has tried to secure long-term access to oil and other raw materials.
Russia has seemed more aggressive with energy resources, suggesting it would do the same with the money it earns from them.
Vladimir Putin, the Russian president, has embraced energy resources as a tool of foreign policy, most notably in a standoff with Ukraine. And one goal of its investment in EADS, analysts have observed, was to help revitalize Russia's own lagging aerospace industry.
The optimists caution that the rising controversy may simply be more growing pains of greater global economic integration. If China and Russia can convince the West their intentions are benign, and act accordingly, then perhaps they will relish being viewed as normal, though very powerful, foreign investors.
"In five or 10 years, dealing with Chinese and Russian investments will be a daily task," said Christian Strenger, a board member at DWS, a major German asset management firm. "And when it becomes much more normal, then this issue may die down."
EU Bashes Sovereign Wealth Funds
Although you may think that protectionist xenophobia is a birthright of America, Europe too is becoming suspicious of countries using their reserve monies held in sovereign wealth funds (SWFs) to buy up local firms. Trot out the usual reasons for shooing away these pesky foreign government investors: national security, geopolitics, "national champions" [I just love that term], etc. From the International Herald Tribune:
