Oh dear. Sovereign wealth hysteria reaches Europe. This is most disappointing.
The backlash against the backlash against sovereign wealth funds is just getting going, but it has previously been across the Atlantic where the most outrageous mud-slinging and scare-mongering about the terrible threat of foreigners bearing cash has been found.
No longer. Felix Salmon, who wants to know how any legislation could possibly work in practise, picks up a comment by European Commission president European Commission President Jose Manuel Barroso. He:
sought to distinguish between Norway’s fund, which he praised, and those outside the Continent. “We cannot allow non-European funds to be run in an opaque manner or used as an implement of geopolitical strategy,” he said.
So it’s a-ok for European funds to be run opaquely and use their monetary might to push geopolitical goals? Or we just trust Norway because they’re a) European, b) white and c) of a Judeo-Christian bent)?
John Kay in Wednesday’s FT points out that there are just six substantial funds - UAE, Kuwait, Saudi, Norway, Singapore and China. Other SWFs are smaller than the bigger pensions funds.
The City of London, he says, appears at the mercy of sovereign wealth, with its electricity supplied by a company controlled by the government of that ancient enemy, France. But it seems inconceivable today that a political quarrel between nations would means the lights going out. It wasn’t always so. Kay writes:
[T]he willingness of business to transcend political divisions in pursuit of commercial advantage is basically a force for peace….Trade across borders binds us together economically by raising the costs of independent action. Investment across borders binds us together by creating actors with much to lose from political tension.
In any case, says Kay, history tells us that in the relationship between international politics and international investment the problems are for the investor and not the investee.
And so to that most shadowy and pernicious of funds, China’s CIC. Unlike a Middle Eastern SWF, CIC doesn’t own the money it runs. It has borrowed from the nation’s FX reserves, and therefore needs to pay interest. After its financial sector-focused investments to date, Standard Chartered’s Stephen Green estimates that it now has $50bn to $60bn on hand to invest, a large chunk of which is expected to be placed with outside fund managers who have applied for the privilege. (Another strut for those who argue that regulating funds tracking back to sovereign control will prove impossible in reality.)
But CIC is still finding its way in terms of strategy, and is likely to find itself constrained by the presence of state companies dominating other sectors of interest, suggests Green. It is currently thought to be staffed by folk from Central Huijin Investments (bought from the central bank last August) and other government departments, with salaries based off an official government scale.
But the central challenge for China’s fund is this:
It was set up on the basic premise that the PBoC/SAFE’s FX reserves were being managed ‘too’ conservatively and generated a ‘too-low’ rate of return….But of course, if one wants a higher return, one needs to take greater risks — and that might mean losing money sometimes, all of which sits awkwardly within a bureaucracy.
The lot of a bountifully capitalised fund is not necessarily an easy one.
