Foreign nations snap up U.S., Europe bank shares

Joseph Quinlan, a stock strategist at Bank of America, said the acronym SWF might as well stand for "salvaging withering franchises."

Many trade experts say that the risks that sovereign funds pose to national security are manageable, although they are significant enough to warrant careful scrutiny.

"They're motivated primarily … to make a profit," says Edwin Truman, a scholar at the Peterson Institute for International Economics in Washington. "But the concern … is that they might be pushed around to do something" by their governments.

The key solution, he says, is already in place: An executive-branch review process that considers national security implications of foreign investments – whether the investor represents a government or some other overseas entity. The process, tightened this year by Congress, is known as the Committee on Foreign Investment in the United States, or CFIUS.

The review authority works, as long as it is used properly, says William Hawkins of the US Business and Industry Council, a private lobbying group for manufacturers. "They haven't been exercising that authority [enough]" he says.

Under the law signed by President Bush this summer, CFIUS reviews now will involve higher-level officials than before and special consideration will be given not just to technology with military applications, but also to critical US infrastructure. Acquisitions by state-owned companies, including sovereign wealth funds, will also get closer scrutiny.

On Thursday, President Bush weighed in on the latest moves by sovereign funds, responding to a reporter's question. He said he is "fine" with capital coming to Wall Street from overseas. The greater worry, he says, would be if the US became protectionist regarding the flow of money.

Experts say that these funds are here to stay – one facet of the rising power of developing nations. Often, these nations don't share America's strong emphasis on the private ownership in economic affairs.

"The rise of SWFs should be seen as a further sign of a shift in the world economy," said Gerard Lyons, an economist at Standard Chartered, in a November congressional hearing on the issue. "Western countries should seize this as an opportunity to work with emerging economies such as China and Russia and others to find common ground rules and a code of practice."

In some of these nations, the line between government and the private sector can be blurry.

In one case now under CFIUS review, Mr. Hawkins says, the Chinese firm Hauwei Technologies is a key investor behind a deal by Bain Capital to invest in US computer-security technology.

"The line between public and private is very thin" in China, Hawkins says.

Beyond ensuring appropriate reviews of such deals, experts say that broader steps could help curb the American trade deficit that has provided much of the fuel for the sovereign funds.

In the recent congressional hearing, trade-law expert Patrick Mulloy recommended three policies in response to sovereign funds:

•Use energy policies to reduce reliance on foreign oil.

•Work harder to address "mercantilist" trade policies of other nations, including export subsidies and currency manipulation.

•even tighter CFIUS reviews. He warned that even without a controlling stake in a firm, sensitive technology could be transferred to other governments.

Mr. Paul of the manufacturing alliance also calls for closer review of both sovereign investments in general, and the trade practices of China in particular.

"There needs to be a process that provides much more scrutiny for these types of investments," he says.

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