International Herald Tribune
Testing open markets
Sunday, July 29, 2007

HONG KONG: The notion that sovereign wealth funds - entities created by governments to buy real assets like power plants, mines and industrial companies in other countries - can play a significant role in the recycling of huge trade surpluses may have a short life.

Just when China and oil-rich countries are creating such funds there are signs of barriers going up in otherwise open markets. Nationalism is one reason. But another is that many countries, starting with Britain under Margaret Thatcher, have spent 25 years selling state assets to the private sector so they now question allowing those assets to be controlled by another country.

Three straws in the wind: First, freewheeling Hong Kong recently announced that sovereign funds would not be allowed to own more than 20 percent of its banks that are entitled to issue their own local currency notes. This was of no practical consequence, but it sent a clear "hands off" message that could be applied to banks in general.

Second, in a move clearly aimed at Chinese state firms, Korea, which after the Asian crisis had given foreigners a freer hand to buy into Korean companies, is barring foreigners from the $8 billion sale of a controlling 50 percent of its premier shipbuilder, Daewoo Shipbuilding & Marine Engineering. It fears Chinese acquisition of advanced shipbuilding technology would undermine its position as the world's leading shipbuilder.

Third, there is angst in Australia over the sale of $4 billion worth of its power- and gas-distribution system to Singapore's state giant Temasek. According to local media, Singapore state entities would then own $26 billion of Australian assets, more than all the commercial assets of the Australian federal government. So much of Australia has been sold in the past decade that foreigners now own $560 billion worth of equity in Australian companies compared with $180 billion a decade ago

Singapore's Temasek also ran into trouble in Thailand last year with its acquisition of Shin Corp., the local telecom giant. That could be attributed to the identity of the vendor, then Prime Minister Thaksin Shinawatra, more than the buyer. But the issue has raised sensitivity in Asia to Singaporean and other foreign state acquisitions. The same is sure to be the case in South Asia and Latin America where economic nationalism has deeper roots and stock markets are less developed than in East Asia

Major Western countries, which need foreign investors to plug their huge trade deficits, remain open in principle. But neither China nor Dubai is likely to repeat the humiliation they suffered in the U.S. when attempting acquisitions of assets - respectively the oil company Unocal and management of some major ports. France, Italy and Germany are all likely to resist attempts by non-EU state entities to acquire major industrial or infrastructure assets.

Lack of reciprocity by the prospective buyers will likely be used as a reason to block any such bids. China, Russia, Dubai, Singapore and most of the other countries with large surpluses and acquisitive state companies keep their own major telecom, power, airline, banking and shipping companies firmly in state hands. (Japan is an exception but it has no mechanisms for state acquisitions overseas and unpleasant memories of some previous ones by the private sector).

For sure, China can continue to make some relatively large minor investments that do not attract hostility - recent examples include its purchase of large minority stakes in the U.S. private-equity firm Blackstone and in Britain's Barclays Bank. A few more large companies, like the British supermarket group Sainsbury that Qatar is trying to buy, will be acquired by oil producing nations. But even these are acquisitions are small relative to the size of the foreign-exchange holdings of China and the major oil exporters.

The subtext of all this is that many countries are willing to go into debt to sustain economic growth but do so on the unspoken assumption that debt is something that is eventually eroded by inflation or currency devaluation. The selling off of real assets like industrial companies is seen as a permanent loss. The point at which nationalist emotion and perceptions of economic self-interest merge may be at hand.