Sovereign wealth funds come under tight scrutiny in US

Sovereign wealth funds come under tight scrutiny in US
AFP
By P. Parameswaran AFP - Monday, February 11 12:15 am

WASHINGTON (AFP) - White knights or vultures? Sovereign wealth funds from Asia and the Middle East, which gave a lifeline to US financial houses rocked by a mortgage crisis, are coming under tight US scrutiny.

The spotlight is on the fledgling, cash-flush China Investment Corporation Ltd. (CIC), which US lawmakers fear could snap up strategic assets in the credit-tight United States and threaten American security and sovereignty.

Emerging Asian economies may also be hurt by the aggressive portfolio decisions of the CIC that could drive up their currencies and allow Chinese products to undercut their goods at home and in exports markets, experts say.

Sovereign wealth funds are large government investment vehicles which shot to prominence by their asset buying spree on the back of an oil price boom in the Middle East and export-driven surpluses in East Asia.

They have however been criticized for lack of transparency and accountability.

Funds from Singapre, Kuwait and South Korea recently took up stakes in US banks struggling with losses from subprime mortgage-related write-downs, including Citibank and Merrill Lynch.

CIC, which manages part of China's whopping 1.5 trillion dollars in foreign exchange reserves, also bought a three-billion-dollar stake in US private equity firm Blackstone Group LP and announced plans to invest five billion dollars in another American group, Morgan Stanley.

While the funds provide critical liquity to credit-tight US and serve as white knights for distressed companies, "these short run benefits should not lull us into a false sense of long term security," said Peter Navarro, a business professor at the University of California-Irvine.

"In fact, the SWFs (sovereign wealth funds) could just as easily be looked upon as vultures than white knights," he told the US-China Economic and Security Review Commission last week as the bipartisan congressional panel considered the security implications of investments from such funds.

Navarro demanded full transparency for funds that wished to purchase US assets and asked that they be completely shut out from investing in any sector, industry or asset deemed to be strategic for US economic or military purposes.

Fund investments so far have typically been below the 10 percent threshold that would trigger a formal security review but US lawmakers have demanded rules to screen the "passive" foreign ownership interests in US assets.

The regulations should "ensure that potential national security implication of such investments are appropriately assessed," said Democratic Senator Jim Webb, among four lawmakers invited to offer a congressional perspective on the issue to the US-China commission.

Officials of President George W. Bush's administration have cautioned against protectionism, which they say could undermine US growth and job creation and restrict foreign fund flows financing a rising federal debt and trade deficit.

Lawmakers are largely concerned about CIC investments in the United States, which they say are financed from foreign exchange reserves derived from a ballooning US-China trade deficit, which racked up a record 237 billion dollars up to November 2007.

The deficit is blamed on China's undervalued currency by many lawmakers.

Already a significant portion of China's foreign exchange reserves -- about 600 billion dollars according to Congressional research -- in invested in US government debt.

"If the pace of Chinese foreign asset accumulation continues at its current pace and a similar portion continues to be invested in the United States, Chinese equity ownership could top one trillion dollars in less than three years," said Brad Setser of the Council on Foreign Relations, a US think tank.

With the Chinese government now adding perhaps up to 600 billion dollars a year to its foreign assets, the CIC's investment strategy will not just be an issue for the United States but also to emerging Asian economies, he said.

The CIC's objectives include pouring investments into developing Asian nations, already facing excess private fund inflows.

The CIC inflows could drive up the exchange rates of these nations, allowing Chinese goods "to undercut" their own goods, Setser said.

"China's neighbors are unlikely to be pleased if China's portfolio decisions put pressure on their currencies to appreciate, allowing Chinese producers to gain at their expense," he said.