Print

Mail

wiki links

Editorial: Not all investment is benign

The finance ministers from the G7 have finally acknowledged the increasing influence of the so-called sovereign wealth funds coming from emerging economies and oil-exporting countries. In a communique issued on Friday the G7 said that these government-run funds were "important participants in the international financial system" but that rules were needed to guide the global investments by these funds.

Sovereign funds have exploded in recent years, with investments ranging from bonds to banks and from real estate to other industries around the world. According to a study by Morgan Stanley, the funds have total assets worth about US$2.5 trillion today and these may grow to US$17.5 trillion in the next 10 years.

While G7 nations welcomed the push for a better understanding of these funds, they were apparently still concerned about the growing cross-border investments of sovereign funds that bear national security implications.

Their answer: Asking the IMF, the World Bank and the Organization for Economic Cooperation and Development to draft rules of conduct for such funds.

Sovereign funds are not new to the financial markets. More than 20 countries -- including Singapore, South Korea, Kuwait, the United Arab Emirates, Saudi Arabia, Russia and Taiwan, have set up their own funds over the past four to five decades, with Brazil and China the latest countries to jump on the bandwagon seeking higher returns on their growing foreign exchange reserves.

But few have an adequate knowledge about how the sovereign funds invest. This fear of the unknown perfectly underscored the concerns of US lawmakers about China taking a shareholding of nearly US$3 billion in New York private-equity firm Blackstone Group through a government-investment vehicle.

It also explains why sovereign funds from the Middle East are under increasing regulatory scrutiny over investments in the London Stock Exchange and the Nordic market operator OMX.

Therefore, it wasn't a surprise that the Mainland Affairs Council last week rejected China Investment Corp's plan to invest in Taiwan's capital markets after the Beijing-controlled company expressed an interest in the Hong Kong, Macao and Taiwan markets.

The council cited the regulatory restriction on Chinese funds as the main reason for the rejection. But it wasn't the term "Chinese funds" that raised the council's concerns; Chinese funds are allowed to invest in the real estate market.

For Taiwan and many other countries, it was the issue of China Investment Corp's openness and transparency that is cause for concern. More importantly, it was a fear that ``political'' rather than "commercial" purposes might be behind the company's investments that raised Taipei's eyebrows.

Many people believe Beijing's expression of interest in investing in Taiwan during the Chinese Communist Party's congress could be nothing but a political campaign targeting people here. There is no one who can allay concern that the Chinese company wants to upset Taiwan's capital markets.

Critics have a point that the government should not take a protectionist stance toward potential inward investments, be it from the China Investment Corp or from other foreign sovereign funds.

Still, the government has the power to block the would-be investments if they pose a threat to the nation's financial market and to national security. No one should compromise on issues such as risk management, transparency and accountability associated with the funds.
This story has been viewed 1468 times.