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| Role reversal: A man enters the Morgan Stanley building in New York. The firm is one of the latest to benefit from multibillion-
dollar investments from nations such as China, Singapore, and the United Arab Emirates. Mark Lennihan/AP |
Foreign nations snap up U.S., Europe bank shares
Rising oil prices are just one force empowering 'sovereign wealth funds' to enter Western markets.
By Mark Trumbull | Staff writer of The Christian Science Monitorfrom the December 21, 2007 edition
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The rise of controversial cash funds controlled by foreign governments has suddenly hit home in a very prominent place: Wall Street.
Nations such as China, Singapore, and the United Arab Emirates are effectively taking multibillion-dollar roles as part-owners of Citigroup, UBS, and this week, Morgan Stanley as well.
To these firms, the moves represent a welcome infusion of cash.
But the moves also call attention to concerns in the US and Europe about how to respond to the rising clout of the so-called "sovereign wealth funds" run by developing nations.
These funds have surged in value, and in ambition, thanks to the rising price of oil and rising exports of goods to the US.
For policymakers, a key worry centers more around the realm of research labs than of banking. Funds run by other governments might operate in a different fashion – perhaps with military interests in mind – than private-sector companies.
Yet some economists also see a risk that overreacting to such concerns could backfire at a time when America needs to have its doors open to foreign investment.
In fact, the larger concern with sovereign funds may be that their rapid growth symbolizes an imbalanced world economy. America has been shipping its dollars overseas to buy foreign goods, and now foreign nations increasingly want to invest them in something with higher returns than Treasury bills.
"It is a direct product of our grossly imbalanced trade relationship," says Scott Paul, who heads the Alliance for American Manufacturing in Washington.
Despite the weakening of the dollar against European currencies this year, he says, "you're going to see another sky-high trade deficit with China."
The more the Chinese containers are unloaded in Seattle or other US ports, the more dollars flow back to China. Greenbacks have also been piling up in oil-producing nations, since their sales are typically denominated in US dollars even when the customer is in Europe or Japan.
The growth of these currency reserves has been stunning.
In a recent report, the McKinsey Global Institute finds that Asian central banks have seen foreign reserve assets grow at a rate of about 20 percent a year in this decade. Oil-nation "petrodollar" assets have been growing at the same rate.
Those assets, when combined, total nearly $7 trillion. That's less than half as much as the global assets of either pension funds or mutual funds. But it's growing at a much faster rate and it's already a large pool of potential cash for government-controlled investment funds.
The sovereign funds target a wide range of investments, generally with the aim of earning a higher return than these nations can reap from the traditional haven: bonds.
Wall Street happens to be the target of the moment, because of turmoil in the banking sector. Banks are eager for infusions of capital, and the sovereign funds see a chance to get an ownership stake at a cheaper price.
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