Lou Jiwei, the head of China Investment Corp, cannot contain his glee. A year ago, sovereign wealth funds were portrayed in the US, Europe and Japan as vultures bent on gaining political influence through their investments. These days, in a welcome change of attitude, governments and companies cannot throw their doors wide open enough.
The scaremongering was fuelled by a mix of xenophobia and legitimate security concerns, illustrated by US opposition to Dubai Ports World’s attempt to acquire six US ports in 2006. To pre-empt such opposition, SWFs last year agreed on the “Santiago Principles”, a code of conduct promising transparent and non-political investments.
Perhaps they need not have bothered. Mr Lou says Europeans now “come to me without conditions”. Japan is relaxing tax rules that previously discouraged Middle Eastern funds from investing in the country.
In fact recipient countries have little choice. After financial markets’ rush to liquidity and safety, SWFs are among the few remaining sources of capital with patience and tolerance for risk. Governments, making a virtue of necessity, can no longer indulge their earlier hysteria. This is good for everyone.
The political worries were always overdone. Many SWFs are portfolio investors of no political consequence. Large strategic equity stakes, however, could give political influence, and may legitimately be limited in sectors crucial to national security. But the politics cuts both ways. France is reportedly considering giving Middle Eastern funds a stake in Areva, its nuclear champion, to reinforce its political influence and improve the company’s prospects in the region.
SWFs also face political constraints at home. Chinese and Norwegian funds have lost record amounts from badly timed shifts into equities and bad bets on US banks. Norway’s government will review its fund’s investment strategy. In less-transparent China, the funds have become even more tight-lipped to fend off criticism.
This illustrates an often-forgotten point. Most SWFs cannot allow themselves to lose large amounts of money on nebulous political strategies. Like large private investors, their purpose is above all commercial. This is obvious for portfolio investments. Strategic investments, too, can serve economic diversification. Abu Dhabi’s decision last month to buy 9.1 per cent of Daimler through Aabar Investments is an attempt to transfer manufacturing skills to the emirate.
We should welcome such deals as rare signs of health amid collapsed trade and retrenching finance.
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