In the export surplus countries – especially China -- and Gulf States flushed with revenues from selling hydrocarbons, massive foreign currency reserve is accumulating. Sovereign Wealth Funds were set up to take care of the gigantic wealth. And these funds are looking forward to go shopping for quality overseas companies. Their purchases of stakes in major financial institutions in the US topped the headlines and lead stories in prominent newspapers recently. To name a few of them, China Investment Corporations, Kuwait Investment Authority, Abu Dhabi Investment Authority and Qatar Investment Authority are among the frontrunners.
To avoid political backfire, these new investors are exceptionally low-key in their purchases. Although the way they loosen their purse string with multibillions of dollars pouring towards the troubled western banks and dealers was impressive, they were very restrained from making any assertive comments on these investments. Indeed, most of these purchases were in form of buying preferential shares and alike. And they did not seek influence in the management of the invested.
If I were the consigliere of these sovereign wealth funds, I would be rather conservative in the way the reserves are deployed knowing that – especially for China – every buck and dime was earned with blood and sweats of the impoverished labors. The future of the financial institutes is far from clear at this moment. While devastating writedowns had blemished the fame of those prestigious golden brands, it is quite obvious that some dead bodies are still hidden. Nobody has full idea how far had the “creative” financial alchemy taken us to, and thus no idea of how far the downward spiral can take us to in the coming days. It is doubtful whether these financiers at the current price level are really a bargain.
The SWFs did not seek controlling stakes in the invested companies or even to nominate directors mainly due to the political concerns. At the same time, as Henny Sender observed, these funds managed by their own managers have only embryonic establishment, unlike some of their older peers like the GIC. They are perfect rookies to investing in financial companies. Investing in these financials without sophisticated establishment to oversee is practically giving money out to be managed by foreigners. They can well remain silent about their investments as they are not accountable to the public. They answer directly to the royal families, emirates or unelected governments. But it is far from satisfactory to kickoff their warehouse building by such large purchases of risky stakes.
Instead of funding the troubled financial institutes, there are lots of opportunities for investment around the neighboring emerging economies. While the western financiers are mostly looking east for investment opportunities, it seems quite absurd to invest into these companies so that they can invest back to our own markets. Unless you totally distrust the ability of the locals in making intelligent investment decisions, I do not see any point to outsource this investment job to those who are still struggling out from the murky swamp of subprime crisis.
Instead of investing in overseas financials, the deployment of the funds should have a clearer focus to facilitate domestic economic development. Let’s take China as an example. There are two major needs for the Chinese economy to continue developing.
Firstly, as a manufacturing giant, the country had swallowed a significant portion of the world supply of natural resources. It is a top-priority strategic need to secure enough natural resources to keep the giant dragon from thirst of oil or hungry of metals. While SOEs like CNOOC and PetroChina are seeking overseas acquisitions, injection of capital into these companies can certainly equip them better to compete with other multinational bidders.
Secondly, the Chinese market was predominantly controlled by State-owned Enterprises (SOEs) which had just recently begun to reform for more efficiency. Private enterprises, on the other hand, were growing and yet remained small in global scale. The small manufacturers had poor records of compliance to international standards for labor and environmental protection, which had created deadlocked problems to the society. To upgrade the enterprises to meet challenges from their multinational competitors and to solve the social and environmental problems, it is obvious that the mammoth SOEs and under-scale private enterprises are going to go through a consolidation process. The challenges are imminent and the government should play a bigger role in meeting them. And the growing foreign currency reserve is an important tool for the government to perform such a role.
The performances of the newly established SWFs characterized mainly by injecting funds into the troubled western financial institutes are far from satisfactory. And the role of remaining a silent investor should not be a long-term goal of the sovereign fund managers. There is still a long way to go before these SWFs to find a fitting role to play in the world economy.
