2007 August 21 Tuesday
Sovereign Investment Funds Worry Western Policy Makers

When governments buy up companies around the world the market becomes less free.

WASHINGTON: For years, the Bush administration has shrugged off concerns about the trillions of dollars that the United States owes to China, Japan and oil-producing countries in the Middle East, arguing that these debts give no undue leverage to foreign governments.

But at a time of global financial instability, the administration has started to worry.

U.S. concerns - like those of many European policy makers - focus on a growing but little understood trend of foreign governments converting their debt holdings into "sovereign investment funds" that are acquiring assets in the United States and elsewhere - and could influence the markets when they buy and sell.

Businesses owned by foreign governments can hire lobbyists to represent the businesses. Then governments can use their business holdings to buy influence in other governments.

Funds in the hands of sovereign governments are becoming huge.

Another concern is the sheer size and potential growth of these funds. Their estimated $2.5 trillion in assets exceeds the sum invested by the world's hedge funds. Also, Morgan Stanley, in a widely cited study, projects that these investment funds could grow to a staggering $17.5 trillion in 10 years.

Globalization isn't the triumph of the invisible hand.

As an example of what sovereign wealth funds can do, in May 2007 China bought 10% of Blackstone.

The Chinese government has agreed to pay $3bn (1.5bn) for a 10% stake in US private equity company Blackstone.

It will give Blackstone a head start in Chinese takeover deals and allow China's government to tap into the global private equity boom.

China tried to buy oil company Unocal in 2005 but domestic opposition in the United States stopped the deal.

The role of China's government in their economy will limit how economically efficient China can become. But even if the Chinese government's interference eventually limits per capita GDP in China to half the US per capita GDP that still will translate into a total GDP more than twice the US. China's huge population mean that China doesn't have to become as efficient as the US in order to become economically much larger.

When US billionaires buy up US politicians there's a greater overlap in interests between the influence buyers and US regular folks than when Chinese billionaires, the Chinese government, and other foreign interests begin to do the same. The elites in the future won't even be your elites.

Share |      By Randall Parker at 2007 August 21 11:06 PM  Economics Globalization

John S Bolton said at August 22, 2007 2:50 AM:

This is another weakness of the openness to anything that someone wants to call free trade;
massive foreign holdings by hostile nations.
It's aggressive socialism with hundreds of billions of new funds each year to throw around, yet we're asked to be loyal
to an openness to such traffic in stolen wealth,
as if free trade properly included that.
Cap China's growth in export manufactures, so long as they're hostile,
we need them to stay down at the level appropriate for the serfs and functionaries of communism.
A regime with the blood of tens of millions on its hands, still in power,
and advertising its continuity with the mass-murderer Mao.

Stephen said at August 22, 2007 5:51 AM:

John, capping China's growth just punishes China's citizens.

On the broader free market point, for every buyer there's a seller, and its not China's fault if the US keeps knocking at its door begging to buy the latest bit of consumer electronics or cheap power tool. If the US has a problem with the way its own citizens choose to spend their own money, then the US should cap the consumption of its citizens rather than blaming the seller.

Kenelm Digby said at August 23, 2007 5:24 AM:

The point is that you cannot cheerlead 'free-trade' on the one hand and excoriate its natural corollary (ie that the more succesful trading nations purchase foreign asstes *as of necessity* to recycle foreign exchange), on the other.

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