08 November 2007

Mandelson urges rules on foreign state investments into EU

Foreign state investments into European and US assets of strategic importance should be subject to new transparency rules, European trade Commissioner Peter Mandelson told US officials on Thursday. Set against comments from July apparently endorsing state-backed funds, the commissioner's call today for regulatory intervention will be seen as something of a cooling towards such institutions, and could make action at the EU level - and beyond - more likely.

Addressing growing concern over Chinese, Russian and Gulf State share-purchases in the West, Mandelson said, "I believe there is a place for oversight of sovereign investment in the genuinely strategic parts of our economies – although determining which sectors those might be is hard enough."

"What we need is a set of principles agreed internationally – a sort of code of conduct for investors and recipients of investment - that will establish the ground rules for the global investment of sovereign wealth. Here again Europe and the US have an interest in working together – and with others," he added.

So-called sovereign wealth funds - state-owned asset-holdings - are thought to be worth a combined 2.5 trillion dollars - almost twice the global value of hedge funds. One worry is that foreign countries buying up US and EU assets may make for volatile markets when they buy and sell. Another worry is that countries such as China and Russia may be buying assets for political or strategic ends rather than for straight-forward market investment: Russia's Gazprom is currently eyeing a stake in Europe's energy market, while Dubai last year wanted to buy operations in six major US ports.

Mandelson's words will be seen as something of a retreat from his defence this summer of a Chinese plan to buy a stake in Barclay's takeover bid for ABN Amro. At that time his perceived reluctance to endorse regulatory intervention to rein in state-backed funds was notable against a backdrop of moves in France and Germany to vet foreign takeovers, and even an openness by his colleague - and notorious free market advocate - Charlie McCreevy to consider action.

"Investments of this sort can be in the interest of the European banking sector. What is the objection? None as far as I can see," Mandelson said in July.

"There is nothing intrinsically wrong about these state-controlled investment funds or banks" he added at the time. "They are a beneficial way of re-distributing surpluses and increasing capital flows."

The trade chief's apparent cooling towards foreign state investments may stem from frustrations European investors are encountering as they try to access burgeoning markets of China and India. Strict rules there make it difficult for foreign investors to obtain important stakes in the industry and finance markets.

He may also be bowing to rising pressure from Washington. The Bush administration has been pressing the International Monetary Fund and the World Bank to develop new transparency rules for state funds to avoid volatility on markets and - particularly in terms of energy assets - in politics.

But Washington and Brussels must tread carefully while considering a new rule book on foreign investment, Mandelson warned.

"The EU and the US are the biggest exporters of foreign direct investment in the global economy, and some $300 billion of our own investments depend on the argument that such capital movements pose no threat," he said.

"We have nothing to gain from a protectionist turn in global investment markets," he added.

Some of the world's biggest wealth funds - known as the Super Seven - are worth more than a hundred billion dollars each. Among them are the Abu Dhabi Investment Authority, the Government Pension Fund of Norway, the Government of Singapore Investment Corporation, the Kuwait Investment Authority and the China Investment Corporation.

By Juliane von Reppert-Bismarck

© Graham Bishop