How Beijing can ease investment mistrust

PUBLISHED : Thursday, 17 April, 2008, 12:00am
UPDATED : Thursday, 17 April, 2008, 12:00am

Sovereign wealth funds are nothing new; some have been around for more than half a century. Nor are they only from emerging economies in Asia and the Middle East; the one owned by the Norwegian government is one of the largest - and most respected - in the world. Yet, controversy has recently dogged many of these funds. Almost every significant investment they make overseas comes under intense scrutiny. Such purchases have led to heated debates about the intentions behind their investments, especially among western governments, primarily the US. They have prompted calls for greater scrutiny, disclosure rules and even curbs on their investments.

It is true that the size of sovereign funds has expanded at a phenomenal rate. The International Monetary Fund has estimated they control between US$1.9 trillion and US$2.9 trillion. Any investment source of this magnitude will cause concerns. But size is not the only issue in the current climate of distrust. Rather, it is really about who owns them and how they are being run. The controversy and suspicions about these government funds are directed, to a large extent, at China. They stem from fears that Beijing might use such investments as tools to further political objectives.

There is no doubt that greater transparency for these funds is justified and desirable. It will certainly help promote trust and further trade. But some of the near-hysteria calling for stepped-up monitoring and detailed disclosure smacks of hypocrisy. Hedge funds and private equity groups are subject to no such scrutiny, yet their esoteric and secretive investment strategies can be far more destabilising and dangerous than sovereign funds, which are usually committed to longer-term investments. Most sovereign funds do not disclose details about their operations. So there is nothing unusual about the secretive nature of China's investment bodies. But this does encourage questions about the intentions behind investments they make. The latest revelations about foreign investments by the State Administration of Foreign Exchange (Safe) are a case in point. According to reports, Safe has taken small stakes in British oil giant BP and its French counterpart Total. Hitherto, it was assumed China Investment Corp (CIC), launched last year, was formally the only state investment fund. This situation needs to be clarified.

China has built up massive reserves from trade surpluses. Until recently, they were invested mostly in low-yield US treasury debts. But the plunging US dollar is forcing Beijing to diversify investments and seek higher-yield assets overseas, especially in the Euro zone. This situation was partly created by Washington. For a long time, the US was perfectly happy to allow China to finance America's debts. It was done with money the mainland earned as a result of a big trade imbalance. This has come to an end with the property market crash in the US and the credit crunch. So Beijing's diversification from US treasuries is perfectly rational and predictable.

Still, Beijing's overseas investment attempts will continue to come up against increasing resistance unless it is willing to assuage suspicions in the west. Singapore and Abu Dhabi have recently reached an accord with the US to provide greater transparency to their state funds' investment activities. Beijing need not go that far. But explaining basic investment principles and asset allocation, and pledging not to mix politics with investment, is a reasonable commitment. There is also a need to clarify the role to be played by Safe and the CIC. These steps will make the position clearer and help ease international concerns.