Daily newspaper “The Christian Science Monitor” - USA

WILL SOVEREIGN WEALTH FUNDS RULE THE WORLD?

These enormous government-owned funds may turn their
economic clout into political gain.
By David R. Francis | columnist
from the November 26, 2007 edition (csmonitor.com)
Sovereign Wealth Funds are huge, scarily big.

Though unknown to most Americans, these government-owned funds

have been getting lots of attention in the financial press as well as
among the world's top central bankers and finance ministers. The
Senate Banking Committee heard lengthy testimony on them earlier
this month.

These funds are mostly the product of accumulated US dollars by

China, with its massive trade surplus, and by oil-exporting countries
reaping generous profits from oil at $90 plus per barrel.

How big are they? Estimates vary. The 28 nations with Sovereign
Wealth Funds (SWFs) have, in total, assets of $2.1 trillion, figures
Edwin Truman, an expert at the Peterson Institute for International
Economics in Washington.

By 2011 or 2012, SWFs could have piled up $7 trillion to $8 trillion,

guesses Harvard University economist Kenneth Rogoff, a former chief
economist for the International Monetary Fund (IMF).

SWF assets could be $3 trillion now and $10 trillion by 2012, reckons
Simon Johnson, IMF research director.

Whatever their size, the huge piles of SWF money ready to be

deployed across borders make some financiers edgy.
 "Our nation is not doing well in the global economic competition,"
Patrick Mulloy, Washington representative of the Alfred P. Sloan
Foundation, told the Senate Banking Committee Nov. 14. He cited
concerns that SWF money will be used not just for economic reasons
but also for political and strategic purposes.

Securities and Exchange Commission Chairman Christopher Cox said

in a speech at Harvard Oct. 24 that "the fundamental question
presented by state-owned public companies and sovereign wealth
funds does not so much concern the advisability of foreign ownership,
but rather of government ownership." These financial and business
entities could act in the interests of foreign governments, not
necessarily the interests of the United States.

Warren Buffett, the famed billionaire investor, has worried that as long
as the US has major foreign trade deficits (some $700 billion a year), it
has to "give away a little part of the country" each year. The US could
end up with a "sharecropper economy," where Americans largely work
for foreign-owned firms.

Mr. Rogoff isn't so bothered by SWFs. He figures SWFs will do "more

good than bad" in an increasingly globalized world economy. He
suspects that most of these funds will be "managed inefficiently" in
their investments, losing a lot of money in many cases, perhaps getting
an average annual return of 8 percent. That is far less than Harvard
gets, for instance, on its endowment money.

But an 8 percent return is almost twice what most nations get with their
huge stocks of surplus US dollars invested in US Treasury bills. And a
higher return and diversification is what most nations are seeking with
SWFs.
 China has $200 billion in an SWF, part of $1.43 trillion in foreign-
exchange reserves, the world's largest. Most is in Treasuries. China's
SWF invested $3 billion last June in Wall Street investment bank
Blackstone Group LP. Its stock promptly sank to $22 from its purchase
price of $31.

To most people, $1 trillion is beyond comprehension. For perspective,

the value of all traded securities (bonds and stocks) denominated in
US dollars is $50 trillion. For the world, it's $165 trillion. If SWFs have
$3 trillion, that's twice what global hedge funds manage and twice the
size of global private equity, reckons the consulting firm McKinsey and
Company.

So far the US government is inclined to take a free-market view of

SWFs. Treasury Secretary Henry Paulson said Nov. 18 that SWFs
"should be able to invest globally." But he noted that because these
funds are large, government-run, and often opaque in their investment
strategies and portfolios, "questions will arise."

The US has a system, strengthened by Congress last summer, to

check on new foreign investment in the US. And the US and other well-
to-do nations are pushing for the IMF to develop a system of "best
practices" for SWFs.

In fact, the IMF concluded its first "annual roundtable of sovereign

asset and reserve managers" on Nov. 16 in Washington. About 60
officials from 28 nations attended, including those of some of the
biggest SWFs. It was a preliminary session, but "very successful," says
Adnan Mazarei, heading the IMF working group on the issue.

Mr. Truman warns that "a lot of countries" with SWFs must agree
before the IMF can institute a "best practices" system. Rogoff says that
some Middle East countries with SWFs may not be keen to meet
"transparency" standards since national elites may be using the funds
to enrich themselves.