There is a rising chorus from Washington and beyond warning about the risk that sovereign wealth funds - especially those of non-democratic governments - pose for US national security and 'economic sovereignty'. The chorus usually begins by praising the benefits of foreign investment, whether private- or state-directed, but ends by singing a different tune.
Senator Evan Bayh, chairman of the Senate Banking Subcommittee on Security and International Trade and Finance, argues: 'Occasionally, foreign governments will have agendas different from our own. They will pursue them using all resources at their disposal, including financial levers. No great nation can permit such interference with its sovereignty.' And he claims: 'If sovereign wealth funds become the global investor of last resort, recipients of their largesse in times of distress will have enormous incentives to comply with all manner of requests.'
But foreign governments have no jurisdiction in the US. Moreover, the recently revamped Committee on Foreign Investment can vet foreign direct investments that prove to be a 'credible threat' to US security.
In fact, sovereign wealth funds are typically strategic investors with long-term goals and are sensitive to political backlash from home and abroad. China's newly formed sovereign wealth fund, the China Investment Corporation, has no intention of getting involved in another imbroglio like China National Offshore Oil Corporation's bid for Unocal that Congress short-circuited in 2005.
More important, one could make a strong case for diversification, given the falling US dollar and the fact that the People's Bank of China now holds foreign exchange reserves worth more than US$1.5 trillion. So far, China Investment Corporation has acquired about US$200 billion, with most of it going to domestic financial firms. Of the US$60 billion or so that will flow into foreign investments, the initial US$3 billion that it injected into Blackstone Group has lost a third of its value.
An iron law of economics is that when you are spending or investing 'other people's money', as in all cases of government largesse, inefficiency and corruption will follow. No one is as careful with the taxpayers' money as with their own. The real question is why China does not allow its citizens to gain control over so-called state assets by widespread privatisation, including establishing private mutual funds using excessive foreign exchange reserves. Most of those funds would be invested in China, the world's fastest-growing economy, rather than in US government securities.
Creating fully funded private accounts, in which the Chinese people could hold foreign as well as domestic assets, would give the Chinese people a stake in the future of global capital markets and help liberalise their own markets.