Overly Expansionist Sovereigns
The news has recently been reported that in early 2010 the managers of the CIC sovereign fund will visit Italy to assess the acquisition of companies and evaluate forms of collaboration with the Italian Treasury (Cassa depositi e prestiti) to co-finance large projects and small and medium firms.
China Investment Corporation, this is its full name, is an equity fund controlled by the Chinese government, i.e. by a sovereign state, hence the name "sovereign fund". Its task is to invest profitably China's huge reserves of foreign currency. CIC started its operations on 29 September 2007 with an initial endowment of $200 billion (its wealth has now grown to almost $300 billion). CIC has invested in financial holdings, oil and mining concerns, without taking on a direct management role. It has also invested in US bonds. The general idea is that it is interested in companies that either have strong ties with their governments or have made sizable investments in China.
CIC is among the youngest of sovereign funds. The earliest sovereign wealth fund, Kuwait's, was established in 1953. In the mid-1970s, Singapore, Abu Dhabi, and the State of Alaska joined the fray. CIC also has an elder and more influential brother: Safe Investment Company controlled by the Chinese Central Bank. Sovereign wealth funds are born to invest either oil-generated revenues (Kuwait, Abu Dhabi, Alaska) or chronic trade surpluses (Singapore, China). Thus, they fulfill the useful function of augmenting international liquidity. However, oil and many other raw materials soon will soon hit their supply peak. Since sudden wealth is often a cause of inflation and waste, it can easily turn into a curse if not used with a long-term horizon. Sovereign funds are a financial innovation akin to petrodollars thirty years ago, which were mostly put back into the international financial circuit by US banks. On the surface, sovereign funds act like traditional investment funds, seeking favorable opportunities and high returns. In this period of economic crisis, they are often invoked as white knights who come to the rescue of ailing firms. At the end of 2008, these funds managed almost $4 trillion and it is estimated this amount will double by 2015. There are however serious reservations about sovereign funds: their culture of low transparency, if not secrecy, and the fact that geopolitical objectives often prevail over financial ones. There have been cases where control of strategic industries was sought for political reasons. Thus there are qualms in letting sovereign funds invest freely in sensitive sectors such as defense, energy, ICT, airlines, and essential raw materials. It is also feared that proprietary technological or commercial information might be unlawfully and detrimentally disclosed.
In May 2008, the Working Group on Sovereign Wealth Funds was started. It is managed by the IMP and has already produced a document setting voluntary rules for investors. Also the OECD has published guidelines for recipient countries, emphasizing the need to avoid financial protectionism and promote impartial and transparent behavior. The EU has taken a similar stance, reaffirming free capital movement but encouraging the adoption of rules by sovereign funds.