China's Investment Tsunami
- From: PaPaPeng <PaPaPeng@xxxxxxxxx>
- Date: Thu, 24 May 2007 21:41:12 GMT
Oil wealth and resources have by and large migrated to nationally held
companies. Government owned oil companiest have eclipsed even the
largest oil majors in assets and in power. This trend is now extended
to private investments. The current private investment houses will
eventually be eclipsed by government owed money entering their
market.
{The top 12 each have anything from $20 billion to hundreds of
billions of dollars to invest (see table). Recently, Japan, Russia and
India have reportedly been considering setting up funds along similar
lines. Some estimates put the size of the funds at $2.5 trillion by
the end of this year (in contrast, hedge funds are thought to have a
mere $1.6 trillion), with another $450 billion in transfers from
reserves being added annually. Including capital appreciation, the
amount could swell to $12 trillion by 2015.]
Just as giant pension funds can call trhe shots on corporate
strategies as often happens now soon it will be the giant funds from
governments that will call the shots. Government funds mean
governments who have budget surpluses to invest. This leaves out
governments who operate based on its ability to issue debts.
Sovereign-wealth funds
The world's most expensive club
May 24th 2007 | HONG KONG
http://www.economist.com/finance/displaystory.cfm?story_id=9230598
China's investment in Blackstone shows how government investors are
flourishing at the heart of the financial system
Satoshi Kambayashi
WITH $1.2 trillion in foreign-exchange reserves and the pool growing
by more than $1 billion every day, China casts a giant's shadow over
the global financial markets, even if it has mostly used the money to
pile up American Treasury bonds. The announcement on May 21st that it
would invest $3 billion of its reserves in Blackstone, a New
York-based private-equity firm soon to issue shares, shows that it is
prepared to barge into murky private markets as well as liquid public
ones. It is not the only inscrutable country to be cosying up to the
inscrutable private-equity industry. Around the world, a secretive
society is emerging of governments flush with foreign assets, some of
them petrodollars, that are increasingly calling the shots in
international finance. The Blackstone deal is likely to stir others to
invest their money even farther away from prying eyes than they do
already.
Like China, whose proposed Blackstone stake is part of $300 billion
that the government plans to set aside this year for investment
purposes, dozens of countries have set up what are now commonly
referred to as sovereign-wealth funds. They manage money drawn from
reserves, natural-resource payments and the like. China is chiefly
concerned to diversify its foreign reserves, but other
sovereign-wealth funds own national, as well as international, assets.
The top 12 each have anything from $20 billion to hundreds of billions
of dollars to invest (see table). Recently, Japan, Russia and India
have reportedly been considering setting up funds along similar lines.
Some estimates put the size of the funds at $2.5 trillion by the end
of this year (in contrast, hedge funds are thought to have a mere $1.6
trillion), with another $450 billion in transfers from reserves being
added annually. Including capital appreciation, the amount could swell
to $12 trillion by 2015.
To the extent governments have traditionally held investment assets,
it was to protect domestic currencies and banks from crisis. Since the
funds were for emergencies, they were of a type that could be
liquidated easily-initially the holdings were in precious metals,
lately they have been in dollars. The idea of building up an endowment
to replace shrinking natural resources did not exist.
That process may have started inadvertently in 1956 when the British
administration of the Gilbert Islands in Micronesia put a levy on the
export of phosphates-bird manure-used in fertiliser. The manure has
long since been depleted. However, a once-tiny set-aside of money has
become the Kiribati Revenue Equalisation Reserve Fund, a $520m
investment portfolio that has grown to about nine times the tiny
atoll's GDP.
A similar approach is now common among oil-producing countries, which,
it is estimated, account for two-thirds of the assets in these
sovereign-wealth funds, and are keen to diversify their national
revenues, aware that their wealth is being pumped away. They have
typically invested along similar lines to central banks, holding
bonds, dollars and bank deposits. Temasek, a Singaporean entity
created in 1974 to pool state-owned investments, started to change the
mindset. It subsequently evolved into an even more complex investment
vehicle. The heady combination of state-control, success and secrecy,
entranced other governments.
Recently, central bankers have also begun wondering whether they have
a fiduciary duty to make higher returns from the public wealth under
their supervision, which could mean placing at least some part of
foreign-exchange reserves in high-yielding, if less liquid,
investments. In Asia this question has become increasingly pertinent
in the past two years, as reserves have mushroomed.
The result has been a torrent of money into a finite pool of assets.
There is no precedent for such fortunes suddenly to find their way
into global financial markets, and they help explain the waterfall of
liquidity that has driven up the value of risky (and less risky)
assets of all descriptions around the world. The world's entire supply
of shares is $55 trillion, and bonds account for a similar amount.
Sovereign-wealth funds could soon become the most important buyers of
such assets, and many others besides. If so, the world will witness
the intriguing spectacle of its largest private companies being owned
by governments whose belief in capitalism is often partial.
The last time governments were this involved in sinking money into
private assets, the process tended to be called nationalisation. Now
the funds are invested both abroad and domestically. A new term will
have to be coined: internationalisation, perhaps.
Northern light
Of the biggest sovereign funds, only Norway's provides anything close
to transparency. Each year it discloses its investment portfolios and
returns. Without such a window on their investments, it is hard to
fathom the interests of other funds-how they vote on shareholder
motions, for example. There are likely to be questions about strategic
objectives, too. What will they care about most? Economic returns,
political objectives, securing strategic resources? It will be hard to
tell.
Andrew Rozanov, of State Street Bank, argues that the lack of
well-defined obligations and the ability to retain funds indefinitely
while not having to reveal results is an investment advantage. The
funds can harvest the benefits of volatility and illiquidity
unavailable to the risk averse. It would not be surprising if some did
particularly well. On the other hand, the same factors that could lead
to higher returns could also lead to corruption and untoward political
intervention.
But the kind of assets the funds invest in-big ones-can generate
frictions even when run properly. Temasek has been embroiled in
controversy in Thailand after it bought Shin Corp, one of the
country's telecoms companies, from Thaksin Shinawatra, the country's
deposed prime minister. China is no stranger to such tensions. In an
event that still rankles, CNOOC, the state-controlled oil company, was
blocked in America, supposedly on national-security grounds from
acquiring Unocal, an oil company. It is quite possible that by
purchasing a non-voting interest in Blackstone, China will be able to
bypass the restrictions that might prevent it doing Unocal-style deals
in Europe and America.
By choosing a private-equity firm, China will also be able to invest
directly in a partner that, notwithstanding its forthcoming share
offering, can keep many of its operations out of the public eye. But
this is where the ironies of the deal are most apparent. "Crony
capitalism? It is a marriage made in heaven-a partnership that does
not want investors to ask questions with a country whose firms do not
want investors to ask questions. I worry about the serious conflicts
of interest this generates. More generally, government entities
shouldn't be in the business of investing in private firms," opines
Raghuram Rajan, of the University of Chicago's Graduate School of
Business.
Moreover, it is widely believed that by having China as a partner,
Blackstone will receive preferential access to China's market (as well
as providing China with experience it clearly covets on how to set up
its own domestic private-equity industry). This is an advantage for
Blackstone, and for its shareholders, China included, particularly so
when other private-equity firms complain that the impediments to
operating in China are growing.
However, providing an economic incentive to a lucky few, even if that
includes the government itself, impedes China's broader need to create
a fair and transparent financial market for all participants. That is
what would produce the most efficient market for capital.
China still has vast holdings of state assets, and its embryonic
stockmarket is bubbling over-if anything it needs more publicly traded
companies. Like other countries with sovereign-wealth funds, it would
appear to need more expertise in selling companies that it owns,
rather than learning
.
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