Increasing difficult environment for Sovereign Funds?

Updated On: Aug 07, 2007

Sovereign funds – wealth and investment funds created by governments to invest and buy stakes into different businesses and companies – look set to grow.   According to Joergen Oerstroem Moeller in Opinion Asia, sovereign funds from ChinaRussia and the Middle East are reckoned to sit on 2.5 trillion US Dollars, and the prognosis suggests that global sovereign funds will have a war chest of 12 trillion US dollars in 2015 - larger than US Gross Domestic Product in 2006.

Singapore with its Government Investment Corporation (GIC) and Temasek Holdings has been in the sovereign fund “business” for some time now. However, with more and more countries getting into the game, the latest being China, some dark clouds are appearing in the horizon for sovereign funds as the latter comes under increasing scrutiny. 

Politicians in some countries have queried the funds' investment strategies while the International Monetary Fund recently expressed concerns that fund activities could disrupt financial markets. With colossal sums at their disposal, these funds acting more or less under supervision by their governments can ostensibly assert control over large parts of the economy in other countries. 

Washington recently signed legislation which will require more checks by the Committee on Foreign Investment in the United States before a deal can go through.  The German Chancellor, Angela Merkel has also called for action from the European Union to set up a body similar to the US Committee on Foreign Investment designed to vet possible acquisitions of European enterprises.  Chancellor Merkel did not mince her words in framing the problem, expressing concern that these so-called “sovereign funds” were often driven by “political and other motivations” rather than the investment returns that drive privately controlled funds.  The matter was also deemed sufficiently important to merit attention from the newly appointed British Chancellor of the Exchequer, Alistair Darling in his first address to the House of Commons on 25 July. His comments were made just as rumors were afloat that the Sainsbury supermarket group was considering a £10.4 billion takeover offer from Delta Two, a fund backed by the Qatari royal family. Darling was quoted as saying that Britain was open to inward investment by Chinese, Middle Eastern and Russian firms as long as it was in accordance with International Monetary Fund regulations on governance and transparency, but not before adding that he expected foreign governments to allow for reciprocal investments by British companies.

Asked if GIC, which manages Singapore’s reserves with funds of more than US$100 billion, was worried about a possible backlash against government investments, Dr Tan said that with an increase in the number of sovereign wealth funds, there will be concerns. The deputy chairman of Government of Singapore Investment Corporation, Dr Tony Tan, said: 'The last thing we would want is protectionism developing. If it's just SingaporeAbu Dhabi, which have sovereign wealth funds, people would not be so worried. But now other countries are starting such funds.'

The concern is shared by Temasek Holdings, a government-linked holding company which have been active in investing globally.  Temasek's managing director of portfolio management, Mr Ng Yat Chung, said yesterday: 'We would be concerned' about any move towards protectionism in the developed economies. 'The free flow of investment is important for economic growth.' 'We are worried we will be lumped together with the other companies which others are concerned about,' he said.

To achieve openness, Temasek has taken steps to be more transparent about its investment strategy as ways to disarm potential critics. 'We distinguish ourselves by our transparency,' said Mr Ng, adding that Temasek voluntarily discloses its financials. And as it also has a credit rating for its bonds, this means its books must be open to scrutiny from credit rating agencies.

Sovereign funds have sprouted and grown in RussiaChina and the Middle East. The Chinese government for example acquired a $3 billion stake in the Blackstone Group, a private equity firm, in the country’s first effort to diversify its $1.2 trillion in foreign-exchange reserves beyond United States Treasury bills and into commercial enterprise.  China has approximately 8 percent stake in Blackstone, which owns companies that have 375,000 employees and $83 billion in annual sales.

In an another twist to the story on sovereign funds, the first purchase by the Chinese government's new overseas investment fund, a US$3 billion (S$4.6 billion) stake in the Blackstone Group, has produced an unusual public backlash within China, couched in nationalistic responses. Bloggers and even some in the mainstream financial media have expressed unhappiness over the drop in value of Blackstone’s shares, pushing down the value of Chinese government’s investments by some US$400 million. 

Urging the government not to invest in foreign funds, bloggers who have been tracking the dwindling value of the government’s stakes were bitterly questioning the investment savviness of their government. “O senior officials of the Chinese government, please do not be fooled by sweet-talking wolves dressed in human skin”, said one of seven scathing postings compiled by an anonymous blogger on Sina.com, a Chinese website. 'The foreign reserves are the product of the sweat and blood of the people of China, please invest them with more care!' The same online writer who warned of wolves in human skin, for instance, also cautioned: 'These fierce wolves are similar to the foreign thieves who pillaged our forefathers, only they are all the more cunning and manipulative, but their goal of pillaging China does not change with the centuries.'

The issue surrounding sovereign fund is likely to get more serious in the years to come as the latter grow phenomenally. A defensive attitude that seeks to block investments from sovereign funds and greater scrutiny by the people themselves over the returns in investments made by the sovereign fund would bring us into uncharted waters.  (6 August 2007)


Free flow of investment 'important for growth'   (Straits Times, 3 August 2007)

Temasek geared for more challenging economic conditions (Straits Times, 3 August 2007)

Tony Tan warns of dark clouds on horizon for markets (Straits Times, 1 August 2007)

Saying No! Foreigners and the birth pangs of new protectionism (Opinion Asia. 26 July 2007)

China to Buy a Stake in Blackstone (NY Times, 21 May 2007)