How Dangerous Are Foreign Wealth Funds?
Massive state-controlled funds are stalking Western markets. Is a protectionist backlash inevitable?
The nationalisation of Sainsbury's is such an absurd notion that not even Marx would think it worth suggesting. Imagine the stink if the Government tried it. Yet nobody seems to bat an eyelid when a fund controlled by a foreign power, and one of dubious democratic credentials at that, proposes taking over Britain's second-largest supermarket chain.
Many in the City would be happy for Sainsbury's to fall to Delta Two – the buyout fund controlled by the Qatari prime minister Sheikh Hamad – so long as the price is right. Yet everything about this proposed deal, from the secretive negotiations on yachts in Sardinia, to the high reliance on debt, leaves a bad taste in the mouth.
What is proposed is a highly dangerous endeavour which, if it enriches a few, is likely to do so at the expense of many.
This row is surely just the first of many to come. At its heart is the rise of a new breed of global investment behemoths, so-called sovereign wealth funds (SWFs). A combination of petrodollars and huge foreign exchange reserves has given these state-controlled funds massive firing power – and they're aiming at Western financial markets, with Britain on the front line.
In fact, the concern is global. Morgan Stanley reckons SWFs already control $2,500bn, or 2.5% of the world's financial assets, a figure set to mushroom, particularly now that China is putting its surplus billions to work. The recent £6.6bn investment in Barclays shows the speed at which global financial power is moving eastwards.
Yet a protectionist backlash would pose far greater dangers to the world economy than any number of SWF buyouts. True, some of these deals are alarming on strategic grounds: it was a relief, for instance, when the pursuit of Centrica by Russia's state-owned giant Gazprom came to nothing, but most involve well-regulated firms operating under the terms of the market in pursuit of mutual gain.
The only caveat is that it's a one-way street: British firms are unable to buy in China, India and Dubai. That needs to change.
The essence of a free market, after all, is that it should be free, but although nobody is scared of Dubai and Singapore, China is a different matter. Its huge trade surplus and exchange rate policy are bad enough, but if it is seen to be buying up the world economy with proceeds there are bound to be political repercussions. Unless China shows restraint, expect a fiery confrontation.
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