Wednesday, April 16, 2008

Sovereign Wealth from China

Interestingly, the U.K. is busily courting more investments by China in its foundering businesses as economic chaos widens. Today the announcement of China's acquisition of 1% of BP was made with some pride.

The recent furor in the U.S. over the spectacle of Dubai acquiring some sway over our port facilities was enough by scare off Middle Eastern investors. Still, when Bear Stearns was in imminent danger of foundering, China helped out with an investment just under 10% - the point at which congressional investigation would have kicked in.

The increasing economic tumult is requiring our financial businesses to run to other countries where wealth is accumulating for some assistance.

Those responses – like the ones that scuppered a Chinese takeover of a small US oil producer, Unocal, in 2005, or a Dubai government takeover of US port operations in 2006 – have had a "chilling effect" on SWFs' willingness to make big investments in the US, he told a conference in New York this week, at a time when the US needs foreign investors to fund its balance of payments deficit.

Many US politicians, though, are not taking that line, and it is difficult to imagine too many making a placid, Darling-style response if it was ExxonMobil or Chevron that had emerged with the Chinese government on its shareholder register. To placate critics, even the free-trade Bush administration is considering reducing the threshold at which a foreign investment triggers an investigation as to its public interest. Currently, an investor has to take a stake of at least 10 per cent before it is subjected to scrutiny on Capitol Hill.

China's is among the sovereign wealth that has been poured into US financial institutions to shore them up after their sub-prime losses. Morgan Stanley, for example, took $5bn from CIC, giving the fund just under 10 per cent of the company in return. So far, these investments have attracted only limited political resistance, partly because of the 10 per cent threshold but mainly because the alternative might be a banking crisis in the US. These conditions won't apply for much longer.
The Chinese government argues that both CIC and the central bank managers investing foreign exchange reserves directly are doing so without political considerations playing a part. They are being prudent in diversifying their portfolios away from US Treasury bills, a traditional staple investment, and seeking out higher returns from other assets, such as blue-chip companies abroad. The question is whether they can guarantee that political considerations will never play a part (the Bush administration has been trying to broker a "code of conduct" that will improve the transparency of their investment processes).

As wealth moves offshore from America's coffers, the search for investment takes that direction too. We have a diminishing place in the world. It looks as if we will have to make compromises with the wealthy to maintain a business position. There, that's financial jargon for 'We're Scrod'.

The betrayal of our workers takes more from the U.S. every day, and ownership slips away from those unwise managers of our wealth who have given us disaster. Depending on consumer confidence was not the value, or strength, behind the dollar that Greenspan and Wall Street thought it always would be. Their second set of books was falsification of the basic truths. The world knows it, and doesn't give its investment on that flimsy basis.

Ten percent is a waystation, ownership of U.S. interests will be sacrificed to save them, as our laws were twisted to keep Bear Stearns afloat. "Too big to fail" is a persuasive argument. It wasn't enough to protect our workers.

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