05 March 2008

Japan Times: Sovereign funds rescue West

Ten years ago some commentators, including myself, were forecasting that the age of Westernization was over and that the age of Easternization was about to begin. Capital and technology that had flowed from the West to the East for several centuries past was now about to start flowing the other way.

At the time the idea was ridiculed. It was claimed the rising Asian nations would go on needing Western techniques and Western investment just as they had always done.

Yet now, 10 years later, the turn-around has indeed taken place. The wealth that once flowed from Europe and America to the Eastern world has dried up and vast new funds from cash-rich Asia and from the oil-producing Mideast, awash with dollars from oil sales, are cascading the opposite way.

These funds are mostly state-owned, or owned by sub-agencies of the state — hence the term "sovereign funds" — and they are colossal. One estimate asserts that some $3 trillion is now in the wings waiting to be invested in Western assets, over and above the vast sums that have already been advanced.

Hardly a day now goes by without news of big new acquisitions by these sovereign funds in banks, property, European and American corporations or in already existing financial holding companies. For example, Temasek, in effect the financial arm of the Singapore government, has taken an $18 billion stake in UBS, one of Europe's biggest banking firms. Kuwait has put around $5 billion into Merrill Lynch and into Citicorp. China, through its investment arm, has taken a big slice of Barclays Bank, one of Britain's largest. The newly established China Investment Authority has also taken a minority stake in Blackstone, the major American investment house, while the Qatar Investment Authority, bulging with earnings from its huge natural gas resources, has also been on a buying spree.

These big new lumps of cash have turned up at a very welcome moment. Most of the Western banks concerned have been nursing immense losses, thanks to their somewhat careless (could one say "greedy"?) acquisition of packages of American home loans, so-called "sub-prime mortgages" that looked such easy money but turned out to be valueless. Where wiser and older heads might have warned about the dangers of too much lending against doubtful security, the young lions who control the major Wall Street and London finance houses thought they knew better. Now their apparent assets have turned out to be liabilities, the borrowings and credit they need to carry on has been withdrawn and they are lions no longer. The Asian billions have therefore come as a blessed relief.

But nothing comes without conditions, or without awkward questions attached to it. In the case of these sovereign funds the central question is whether they are straightforward commercial investments or whether there is a bigger political agenda behind them. Are they simpler shrewd investments by financial managers who are looking for a good place to park their funds, or are they part of a much bigger political strategy on the part of the governments behind them to own, and may be eventually control, major Western enterprises?

Most of the sovereign fund managers, and the government officials behind them, have been at pains to assure the world that their investments are entirely "passive." That is to say, there is no secret agenda aimed at seizing control of Western banks and other businesses, and that these funds will act like all other quiet shareholders and will not interfere in the business.

The fact remains that these sovereign investments are not the same as normal commercial funds. They have behind them not shareholders but governments and states. These may be prepared to pay inflated prices for assets and to sit patiently on big losses since they may have other, longer-term aims in mind than merely making profits.

There is an even deeper question. Does money power bring political power along with it? Will those who lend the cash to shore up the Western capitalist system always be content to act in a passive role, or might their political masters, who in reality own them, start dictating the global political agenda as well. That is exactly what happened when the flows were the other way round in the 19th and 20th centuries. British, French, American and other wealth creators and investors, with the full backing of their respective governments, imposed their political will on the developing world, often using military force to occupy territories, subdue local opposition and protect their investments.

Yet strangely enough it could be that the East in the 21st century may prove wiser than the West did in the past. It could be that by studying history the new political leaders of Asia have grasped the central lesson of the recent past — that sticking to open trade and concentrating purely on securing investment returns on their savings and capital provides a much sounder way to prosperity than taking whole companies and countries over. Managers should be left to manage. Politics and investment should be kept as far as possible apart.

That, at any rate, is what Western bank chiefs and corporate chairman must hope as they gratefully receive the Eastern cornucopia. But it is early days yet in this new order of things, and the financial muscle of rising Asia may yet turn into something much tougher.

By DAVID HOWELL

David Howell is a former British Cabinet minister and former chairman of the Commons Foreign Affairs Committee. He is now a member of the House of Lords.

© Graham Bishop