COLUMNISTS Markets go in cycles so we should not be surprised that Barclays bank has agreed to acquire two new shareholders: the Chinese and Singaporean governments. Two decades after the UK pioneered the privatisation of state-owned enterprises, it is allowing companies to fall into government hands. The governments just happen to be foreign.
Britain’s sanguine view of the potential €13bn ($17.8bn) deal that would involve banking and investment arms of China and Singapore taking stakes in Barclays extends elsewhere. The government has shown little concern about a potential bid for the supermarket group J. Sainsbury by a Qatar investment fund. Alistair Darling, chancellor of the exchequer, this week emphasised that it welcomed private investments by the growing array of sovereign wealth funds (SWFs).
It is not the only country to face the issue. The Chinese government, which is looking for other ways to invest its $1,200bn of foreign exchange reserves than in US and European government bonds, has also taken a step into the US. Its new foreign reserve investment fund paid $3bn for a 9.9 per cent stake in Blackstone, the private equity group, as part of its recent initial public offering.
Hardly anyone else is as relaxed about the phenomenon as the British. The US has shown its suspicion of foreign state-controlled companies taking control of “strategic” industries by blocking a proposed takeover of Unocal by the Chinese oil company CNOOC and forcing Dubai Ports World to shed the management of a group of US ports acquired in its takeover of P&O Ferries.
The German government, which has long been wary of investment vehicles such as hedge funds and private equity funds taking control of German companies, is leading a backlash against SWFs. Angela Merkel, the chancellor, wants the European Union to adopt a similar defence mechanism to the US: an agency to scrutinise foreign takeovers. Peter Mandelson, the EU trade commissioner, says the EU might allow governments to hold “golden shares” in some industries to block some acquisitions.
For those disposed to be concerned about the impact on their national economies of global flows of capital, SWFs are the new bogeymen. Not since the 1970s have so many countries accumulated so much wealth so quickly. Not only are oil and gas-producing countries from Norway and Russia to the Middle East flush with cash but Asian countries with trade surpluses – notably China – are building up huge reserves.
Morgan Stanley, the investment bank, estimates that SWFs such as Singapore’s Temasek and the Brunei Investment Agency hold $2,500bn in funds and could accumulate $12,000bn by 2015. Stephen Jen, its currency strategist, worries that protectionist pressures will increase as SWFs invest in western banks and high-technology companies both for the financial returns and to acquire skills and technology that they would not be able to develop on their own.
A lot of the worry about SWFs is over-blown. Many have been around for a long time without prejudicing national security and hobbling capitalism. One reason for the UK’s equanimity is that London has long prospered as a financial centre from being the place to which SWFs come to have funds managed. Barings’ asset management arm, for example, was built in the 1970s on its link with the Saudi Arabian Monetary Agency.
The fact that they are investing in equities rather than simply in government bonds is more a reflection of the fact that they have a lot of money than of a covert desire to control foreign companies for strategic ends. Clay Lowery, a US Treasury official, pointed out recently that if SWF managers had bought all of the reserve assets, including US and European government bonds, issued in 2006, they would still have had $720bn left in the kitty.
This even goes for China. The Chinese government has encouraged its big domestic companies to acquire foreign ones in order to gain expertise and brands. But moves such as China Development Bank’s deal with Barclays are driven by both the need to find investments and managers’ efforts to survive China’s shake-out of state financial institutions.
SWF investments can also be good for the western companies involved. The assumption of many companies until recently was that, in order to gain access to the Chinese market, they had to form joint ventures or acquire stakes in Chinese companies. But Barclays and Blackstone may gain similar benefits without investing any of their own capital – in fact, while gaining fresh capital from the markets that they covet.
There are grounds for caution if some countries try to acquire entire companies in particular sectors. I see no reason to worry about Qatar buying Sainsbury as long as it does a better job of competing with Tesco. But, given Russia’s appalling record of seizing energy assets from foreign companies and using Gazprom as a vehicle of influence, I would not want the UK’s energy pipelines to be controlled by Vladimir Putin.
That justifies a blocking mechanism of last resort, whether in the form of a golden share, or a ban on foreign state entities holding voting rights in some companies. It would spoil the point of having privatised so many government-owned enterprises in the past two decades if they just returned to another state’s ownership.
For the most part, however, like the hedge fund and private equity fund before it, we should stop worrying and learn to love the SWF.
