The nationalistic political backlash against this foreign acquisition of US capital is altogether hypocritical. Foreigners are selling us their high quality goods and services because we are on a national consumption binge and they are getting tired of getting in return useless low-return IOUs of the US government. There are plenty of great assets and gems in the US that are [worth] much more and provide in the long run much higher returns than T-bills. So, they rationally want to buy those assets, i.e. lend us in the form of equity rather than debt. And these foreigners are, increasingly, not just private investors but also central banks and other public authorities that have accumulated low-return dollar reserves to the tune of almost $400b last year alone with a total stock of such dollar reserves that is close to $3 trillion now. Also, altogether hypocritical is the behavior of US politicians who lobby hard all of the world to open up their markets to US foreign direct investment and now they are screaming, under the fig leaf of national security, about the foreign FDI into the U.S. And a big fig leaf it is as "national security" arguments have always been the first and last refuge of protectionist scoundrels. In France, the attempt by a US company to buy Danone, a yogurt producer, was repelled based on similar national security - or national pride - arguments; and such French resistance led to rightful mockery and scorn of such French yogurt nationalism.With that in mind, let's move to this London Times piece which pretty much operationalizes this "we don't lakh you furriners" sentiment. The UK is also mentioned as are several other G7 members wary of SWFs. While the current account deficit is "only" around 3% of GDP here in the UK, the sentiment doesn't differ:
Now, both in the CNOOC-Unocal case and the Dubai-port case, national security scoundrels are hiding behind a flimsy national security argument to stop an altogether legitimate business transaction. Unfortunately, since the US is hollowing out the only goods and services that we are still producing at home are weapons, airplanes, high tech goods, oil and other important commodities, financial services and other high tech services. And for each of these goods/services, one could make the argument that they are of some "national security" interest; any of these goods may have in principle military or security implications, even our ports as the current saga suggests. Unfortunately, for a country like the US whose core industrial base is hollowing out these are the goods and services that are up for sale and that foreigners want to buy. So, we may want to get used to it.
The United States is to call for draconian rules to control sovereign wealth funds, the vast, opaque, state-backed financial powerhouses that hold assets worth about $2.5 trillion (£1.2 trillion).
The proposal will be made this week in Washington at the meeting of finance ministers and central bankers from the Group of Seven (G7) nations, The Times has learnt. Observers question whether such regulations will be able to rein in the funds.
There is increasing concern in Britain over the influence of sovereign funds. About half the shares in the London Stock Exchange are held by Qatar and Dubai, with the former close to acquiring J Sainsbury, the supermarket chain. Temasek, of Singapore, and the Chinese Development Bank both have stakes in Barclays.
The US is expected to call on G7 leaders and the International Monetary Fund to agree on a set of guidelines demanding better disclosure by the sovereign funds and giving governments greater ability to scrutinise their activities. It is expected to be the first time that the subject of the funds will appear in the closing statement of a G7 meeting and should generate a fierce backlash from the countries that manage the largest funds.
The calls come amid mounting fears that the aggressive funds — which are focusing increasingly on the stocks of listed companies and other mainstream investments — could destabilise financial markets and be used to mount stealth takeover bids for a range of strategic assets.
A report this morning will say that Western economies are on a collision course with the sovereign funds. “There is a serious likelihood of Western governments and sovereign wealth funds clashing over what they can buy and where,” Gerard Lyons, the chief economist of Standard Chartered and the author of the report, said.
“We are likely to see Western governments seeking to protect national champions and strategic sectors, as is their right” [blah-blah to that].
The rapid growth and broadening activity of the sovereign funds follow the long-term surge in crude oil prices and the amassing of huge foreign exchange reserves by Asian economies that manipulate their own currencies. One main proposal from Washington will be that the funds declare what proportion of their investments is held overseas.
The sovereign funds that have raised the most concern include those run by Singapore, Russia, the United Arab Emirates and, most recently, the $200 billion behemoth launched by China last month. Merrill Lynch analysts predict that capital managed by sovereign funds could hit nearly $8 trillion by 2011 and many believe that the funds soon will exceed the entire hedge fund industry in market influence.
The US position on sovereign funds was clarified over the summer in a largely unnoticed speech by Clay Lowery, the Under-Secretary for International Affairs at the US Treasury. Identifying a potential “impact on financial market stability”, he said that because so little was known about the funds’ investment policies, minor comments or rumours could spark volatility. “It is hard to dismiss entirely the possibility of unseen, imprudent risk management with broader consequences,” he said in June.
Cabinet Office insiders in Japan told The Times that Tokyo had held informal discussions with Washington over the growing market influence of the sovereign funds and that it doubtless would back the US proposal. One source said: “The shared concern by Japan and the US is that the funds do not behave according to traditional market logic, and that is why we need greater transparency. ”A source close to the Bank of Japan said that Japan was “institutionally terrified” that its high-tech industrial base would become the target of emerging economy governments via the funds.
The French Government has highlighted the rising influence of the sovereign funds and is understood to be producing a report on how to deal with the political threat posed by them to the country’s “industrial jewels”.
BTW, the speech by the Treasury official Lowery mentioned in the Times article is worth perusing as to why the US demands more "transparency" [snicker] for these SWFs. The natural retort, of course, is that beggars can't be choosers. If Sammy doesn't find his creditors to his liking, then maybe he should stop bringing out the cup year in and year out. Actually, Lowery makes a good point that with so much reserve accumulation happening overseas, other countries were bound to run out of Treasuries, Agencies, Gilts, Bunds, etc. Protectionism, red in tooth and claw, is very much alive:
Some back-of-the envelope math demonstrates why this trend toward higher risk-return management of official assets is to some extent inescapable, or what has been perceptively called "forced diversification." In 2006, official foreign exchange reserves grew by 20% or $843 billion. If we assume for simplicity a similar percent increase in Sovereign Wealth Fund assets, we add $336 billion. Setting aside valuation changes, this brings total 2006 official flows to nearly $1.2 trillion.
In comparison, 2006 net issuance of the most traditional reserve assets – U.S. Treasuries, U.S. Agencies, euro area government securities, and UK Treasuries – totaled $461 billion. So even if reserve and Sovereign Wealth Fund managers had purchased all 2006 net issuance of these traditional reserve assets, they would still have had some $720 billion left over. Of course this remainder can be invested in the existing stock of these securities, but part is also likely to find its way to other assets and asset classes.
