Temasek Holdings

Barriers to trust

PUBLISHED : Saturday, 29 December, 2007, 12:00am
UPDATED : Saturday, 29 December, 2007, 12:00am

Led by the likes of China and Singapore, major Asian trading nations have amassed huge stashes of cash in foreign currencies from their exports. They have been joined in the past few years by big oil producers, particularly in the Persian Gulf and Russia. This group is now investing around the world through government-owned sovereign wealth funds, not always in ways that are welcome in the west.

While some of these funds, such as those in Singapore and oil-rich Norway, have operated for several decades, the current proliferation of recently established funds in China, Russia and the Middle East has triggered fresh fears. The core concern, in the United States and Europe, is that the rapidly growing amount of capital in state hands will be used by the often secretive funds to take over strategic assets, and gain undue political influence and leverage.

Concern is not confined just to the west. Indonesia's KPPU competition watchdog ruled last month that Singapore's state investment arm, Temasek Holdings, had violated anti-monopoly laws through its investment in Indonesia's two largest mobile phone operators. It ordered the Singapore company and two majority-owned telecommunications firms to divest their stake in either Telekomunikasi Selular (Telkomsel) or Indosat. Temasek and the two firms appealed the rulings this month.

Analysts estimate that sovereign wealth funds have ploughed over US$37 billion into foreign banks and other financial institutions since April, and that this activity is being intensified as the funds seek bargains in the US and European credit crunch and stock market downturns.

According to the Peterson Institute for International Economics in Washington, the top 10 sovereign wealth funds already have assets worth as much as US$2.2 trillion. The biggest, the Abu Dhabi Investment Authority, is worth between US$500 billion and US$875 billion. Singapore's two sovereign funds, the Government of Singapore Investment Corporation (GIC) and Temasek Holdings, together control as much as US$438 billion in investments outside the island state.

But is this really sinister? Some of the most recent investments by the funds of these two small but rich nations have been widely welcomed for helping to stabilise several foreign banks and financial institutions. On Christmas Eve, Temasek invested US$4.4 billion for a stake of just under 10 per cent in Merrill Lynch to shore up the US broker's capital base following heavy losses in risky US mortgage-related loans. Earlier in December in similar circumstances, Singapore's GIC pumped nearly US$10 billion into Switzerland's UBS, one of the world's leading banks, to buy a 10 per cent holding after UBS turned to Singapore and an unnamed investor from the Middle East for funds. Last month, the Abu Dhabi fund paid US$7.5 billion for a stake of nearly 5 per cent in Citigroup, America's biggest bank, to bolster its capital base eroded by credit-market losses related to subprime mortgages.

China's new sovereign wealth fund - the China Investment Corporation (CIC), which is modelled on Singapore's Temasek - began operations in September. It was set up by Beijing to help improve returns on China's US$1.46 trillion in foreign-exchange reserves. CIC said on December 19 that it would make a US$5 billion cash injection into Morgan Stanley for an equity stake of as much as 10 per cent after the firm, one of America's most prestigious investment banks, announced an additional US$5.7 billion mortgage-related write-down.

US President George W. Bush said recently he was 'fine' with foreign investors snapping up hefty shareholdings in top US banks and financial firms.

Sovereign wealth funds are likely to emerge as an increasingly prominent feature of the international investment scene as countries marshal and deploy their savings in search of better returns around the world.

David McCormick, the US Treasury's undersecretary for international affairs, said recently that while more openness on the aims, investment strategy and governance of sovereign funds was needed, they generally had a good record: Their investment 'has largely been long-term, very commercially focused and very stable', he said. But as the financial clout and global reach of sovereign funds grows, calls for greater transparency, and even regulation of their operations, will grow.

Germany, France and Italy are already moving towards legislation to limit the funds' building of large stakes in defence, energy and other companies they consider to be strategic. Meanwhile, the International Monetary Fund and the Organisation for Economic Co-operation and Development are working on codes of practice for the funds, to ease concerns.

Some sovereign wealth funds criticised in the past for being overly secretive now say they welcome the chance to clarify their objectives.

They evidently realise that, without it, their future investments could run into barriers amid rising financial and trade protectionism in the west.

Michael Richardson is a security specialist at the Institute of Southeast Asian Studies. This is a personal comment