Left Flank

At least one sovereign wealth fund has a clue about public relations.

GIC, which says it manages more than $100bn but is estimated by analysts to oversee three times that amount, has come under intense scrutiny after injecting $16bn in UBS and Citigroup. The investments, a departure from GIC's low-key approach, have prompted politicians to question the fund's influence, while some UBS shareholders have complained the investment dilutes existing investors.

Mr Tan insisted GIC was interested only in a financial return, and revealed the fund had recently rejected an offer from UBS to nominate a board director. «I think we want to be seen to be quite clear that we are not seeking control,» he said. Along with funds from Abu Dhabi and Norway, GIC is helping co-ordinate an effort by the International Monetary Fund to agree common standards for sovereign wealth funds.

Mr Tan said concerns in Europe and the United States were «understandable» and should be addressed. However, he said guidelines should be flexible, voluntary, and recognise that not all funds were the same.

GIC's investments in UBS and Citigroup have prompted some observers to suggest it is becoming more aggressive. But Mr Tan said the fund had been able to invest such sums because it cashed in a significant chunk of its equity investments in 2007, before the market turmoil struck. He said the investments in UBS and Citigroup were unusual and did not reflect GIC's «preferred mode of investment».

I guess it's tough for SWFs, so the 'nice guy' image is highly coveted.

Firstly, a primer on sovereign wealth funds. Big conclusion:

What are the geoeconomic implications of SWFs?

Experts say the emergence of sovereign wealth funds represents a fundamental shift in the reasons governments invest money. «To the extent governments have traditionally held investment assets, it was to protect domestic currencies and banks from crisis,» writes the Economist. Modern sovereign wealth funds go well beyond this basic agenda. Writing in the Washington Post, Sebastian Mallaby, the director of CFR's Center for Geoeconomic Studies, says global government currency reserves have expanded «way beyond their prudential needs and more than triple the amount in the world's hedge funds.»

Mallaby says finance ministries in the past have typically invested currency reserves in U.S. treasury bills and other risk-free bonds issued by wealthy countries. SWFs provide countries with a broader range of investment options. A shift away from U.S. Treasury-backed bonds as the default option for government currency-reserve investments could hold ramifications for global currency markets. Most notably, as many commentators mentioned at a December 2007 CFR meeting examining the consequences of a falling dollar, the world could be witnessing the end of an age of dollar dominance. Benn Steil, CFR senior fellow and director of international economics, cites a «long period of excessively loose monetary policy,» meaning the United States has printed a lot of dollars.

The issue of dollar dominance is a much more nuanced one than bellowing about protectionism and jobs. On the surface, I don't see the problem, because the US economy should benefit from the money injection. The worst scenario is one where investors flee the US, resulting in a smaller job market. As long as US companies and labor can use this injection to modernize and grow the economy, Americans should emerge as winners. Other bad scenarios are where bad habits continue, or if protectionism results.

At a time when Western governments have at last learned to let the private sector run banks (however lousily it is sometimes done), it is far from ideal that state-owned funds from emerging economies should be buying stakes in them, even minority ones. On the other hand, such cross-border bargain-hunting gives developing countries a bigger direct stake in capitalism's future. The chief danger will not lie with them. The problem is likely to be in the rich world—and a rising nervousness about foreign money.

Also, what is the result when these investors fail to grow their own economies? It's great they want to invest in America, but, by taking the gift, is America courting political revolt in the worst places in the world due to America's own bad policies?

Note: Victor Shih offers the WSJ article on the PRC-US ramifications of sovereign wealth funds.

PRC's Wei Benhua, vice head of the State Administration of Foreign Exchange, sent a shot across the bow.

"The international society should take a clear-cut stand against protectionism in various forms in both investments and the financial sector," Wei wrote.

He said sovereign wealth funds should boost their transparency but cautioned against haste in doing so, saying this could lead to market panics.

Wei said the CIC would respect all laws in countries in which it invests and actively participate in global discussions to ensure that regulations covering sovereign wealth funds benefit its own development.

Does Wei mean Safe Investment Company?

It is a direct subsidiary of Safe, the government department that regulates foreign exchange transactions and also manages China's nearly $1,500bn in foreign exchange reserves.

But the entity is so secret that Safe repeatedly refused to acknowledge its existence to the FT, until it was confronted with incontrovertible evidence.

China's central bank, which ultimately controls Safe, told the FT that Safe Investments was set up just one month before the hand-over of Hong Kong from Great Britain to China in 1997 to «support and promote the development of Hong Kong's financial market» and served a crucial role in defending the value of the Renminbi and Hong Kong's peg to the US dollar against international speculators.

According to people familiar with Safe Investment's operations, it served largely as a minor outpost for Safe in the years following the Asian financial crisis, with only about $20bn in funds under management.

But the amount under management at Safe outposts has increased substantially, according to one person familiar with its operations.

«Safe's subsidiaries around the world have until now been responsible for running Safe's book over the various time zones and have basically replicated the portfolio of head office in Beijing but that appears to be changing with the Hong Kong subsidiary taking more risk in managing reserves,» the person said.

Safe's main office in Beijing manages portfolios of fixed income securities such as Treasury bonds, currencies and commodities, according to a person familiar with its operations, who said it is common for Safe to execute trades of up to $1bn at a time.

Analysts say internal politics may account for Safe diversifying away from its previous mandate of low-risk liquid securities, albeit on a relatively small and carefully concealed scale.

«This shows characteristics of a Chinese bureaucratic rivalry,» according to Arthur Kroeber, managing director of Dragonomics, an independent research firm. «It might be that, having been forced to surrender control of Huijin to CIC, Safe and the central bank are now lobbying for authority to make alternative investments on their own account.»

Oh, yes, transparency!

Matthew "New Deal" Yglesias and Tyler "SWF" Cowen are still talking about Paul Krugman's "protectionist" about-face. Both oppose Krugman's call for social safety nets to help the losers from free trade.

The Economist points out two problems with SWFs, or sovereign wealth funds: transparency and knowledge. "The last time governments were this involved in sinking money into private assets, the process tended to be called nationalisation. Now the funds are invested both abroad and domestically. A new term will have to be coined: internationalisation, perhaps." An American SWF could hide its decision-making in a blizzard of paper and regulations. Moreover, it is mostly likely an SWF would invest less efficiently than a private investor. That goes for Yglesias' and Cowen's arguments.

Both Cowen's and Yglesias' proposals would create more problems than they solve. Foreign governments would certainly take Washington's creation of SWFs as a cue, that multilateral trade reform is dead. Also, individual governments might oppose American SWF-led investment just as America does. As many have commented on both sites' boards, an SWF wuld be prone to corruption caused by lobbying. SWfs would likely exacerbate already existing market distortions, like tariffs and subsidies. The first-best solution is reducing these barriers; the second-best involves the right combination of domestic employment insurance, domestic healthcare reform, domestic pensions reform, multilateral immigration reform, multilateral financial reforms, private investment, and education needed to maintain an increasing rate of global and domestic economic growth.

Krugman is right.

There might be a chocolate lining in the debate between those like Britain's "shadow chancellor" George Osborne:

Mr Osborne's support for Chinese inward investment comes amid unrest in parts of Europe over the possibility that China and the Gulf states could use their fast-growing funds to buy companies for political reasons.

Mr Osborne, who recently visited China, endorsed the trend where «increasingly in Britain we see not just 'made in China' but 'owned by China'».

«Those of us who believe in free trade should welcome this investment,» he said. «We should resist the siren calls of protectionism in all its forms.

«China's development is bringing balance back to the world economy.»

...and Christopher Cox, chairman of the US Securities and Exchange Commission, who warns "...governments behind these funds could use their spy agencies to illegally collect insider-information on companies."

What goes around the world, like money and chocolate, comes around...and often settles right around the waist.