Wednesday, November 28, 2007

SWF, enjoys investing, pina coladas

One consequence of the US current account deficit is increased foreign ownership of American assets - essentially, our trading partners are getting stocks and bonds in exchange for all the goods they're sending us.

Because of central bank intervention in foreign exchange markets and since we buy much of our oil from state-owned firms, much of these assets are in the hands of foreign governments. Traditionally, much of this wealth has been invested in US Treasury bonds, but increasingly foreign governments are forming "Sovereign Wealth Funds" (SWFs) with more diversified portfolios, including, in some cases, purchases of whole companies. The New Yorker's James Surowiecki writes about the concern this is generating:
What are people so anxious about? The first concern is obvious: no one wants foreign states, especially those which might be anti-Western, acquiring Western companies that have anything to do with national security or advanced technology. But policymakers also believe that having governments play an active role in the stock market and in the global economy might make the whole system less efficient and productive, since government-run companies would likely think about things other than the bottom line, including protecting the interests of their home country. This situation has put free-marketeers in a peculiar quandary. They usually favor the free flow of capital in the world’s markets, but, in this case, supporting the free flow of capital would mean letting governments run American companies, which no free-market economist thinks is a good idea.
The New York Times ran an article on the spending spree of oil producing countries under the headline "Oil Producers See the World and Buy it Up." One notable deal was Abu Dhabi's $7.5 billion investment in Citigroup yesterday. The Times reported:
A falling dollar, a growing pile of oil revenue and an interest in not being overshadowed by neighboring Dubai’s increasingly high profile spurred Abu Dhabi to break with its low-key investing tradition to purchase a big $7.5 billion stake in Citigroup.

That is the view of analysts, economists and deal makers who keep an eye on the secretive Abu Dhabi Investment Authority, the largest sovereign wealth fund in the world, with assets estimated at $650 billion. Despite its size, Abu Dhabi’s royal family has been largely content to pour money into low-return, low-profile investments — until now.

But Abu Dhabi, the largest oil producer of the seven city-states that compose the United Arab Emirates, is worried enough about the eroding value of its pile of petrodollars that it appears ready to pursue more big-ticket deals.

The article has a nice sidebar listing some other notable SWF purchases.

Should we be concerned? Surowiecki suggests that if we really don't like foreign governments buying our companies, we might want to change our own behavior:

The prospect of American companies being sold to foreign states is, to be sure, disconcerting. But it’s a problem of our own making. The reason that sovereign wealth funds are so flush with cash is all the dollars we spend on oil and Asian consumer goods. If we want to consume far beyond our means, then, one way or another we’re going to end up selling off assets to pay for it. Passing laws barring foreign states from acquiring American companies may help treat the symptom. But it’s not going to do much to cure the disease.

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