SWF Radar HenryPaulson

braekingviews.com writes that, “Treasury secretary Henry Paulson's new fund is better than anything yet cooked up by the governments of Kuwait, China, Singapore, Abu Dhabi or others that have sprinkled their taxpayers' surplus cash around the world the past few years.”

Richard Spencer writes in The Telegraph that, “My favourite friend of China, US Treasury Secretary Henry “Hank” Paulson, has decided not to rescue Lehman Brothers. What has his decision got to do with China? Nothing and everything and a delicious irony, as far as I can see.”

RIA Novosti reports that, “At a meeting with the Russian prime minister [on Monday], Henry Paulson told Vladimir Putin that the U.S. welcomed investment, including from state sources, and would do everything to make sure the investment flows continue.”

Thomson Reuters reports that, “Russia does not yet have a sovereign wealth fund (SWF) but is working to create one, Prime Minister Vladimir Putin told U.S. Treasury Secretary Henry Paulson on Monday.”

The article quotes Putin as telling Paulson that, “Since we do not have a sovereign wealth fund yet, you are confusing us with someone else. But we are ready to [create a SWF], especially if you want us to.”

Russia’s National Wealth Fund (also known as the National Welfare Fund or National Prosperity Fund), which was formed by splitting the Stabilization Fund in two (with the greater part of the assets being assigned to the Reserve Fund, the other fund formed in the split), is generally considered to be Russia’s SWF.

Taking the second part of the Putin quote at face value, it could make sense for the United States to ask that state foreign investments be channeled through SWFs that identify themselves as such. This would make such investments easier to track and regulate and would certainly facilitate and add significance to the work of the IMF’s International Working Group.

But the US Treasury’s recent agreement with its Chinese counterpart to clear the way for indirect foreign investment by China’s SWFs via the country’s state-owned enterprises disconfirms that such transparent channeling is being explicitly sought.

The Times writes that, “China’s secretive sovereign wealth funds will help its state-owned companies to expand overseas in a shift of strategy after economic talks with America [led on the American side by Henry Paulson], according to analysts in Shanghai. … Sovereign funds will assist inexperienced Chinese companies in financing, foreign-exchange risk management and handling trade barriers.”

According to the article, China agreed in its negotiations with the US to open its capital markets further to foreign institutional investors, its aim being to “secure reciprocal treatment to smooth the way for its own companies to build up their foreign holdings.” Such reciprocation would free up China’s SWFs, through supporting Chinese companies, to become “indirect owners of big stakes in troubled financial institutions such as Lehman Brothers as they step up the pace of investment abroad.”

Certainly this focus on supporting companies, which must surely mean SOEs, in their expansion abroad adds an extra degree of political manipulability to Chinese SWFs. Brad Setser, in a post on his blog yesterday, mentioned this problem, writing that, “It is hard to see how a government fund that has to choose to finance the overseas ambitions of some Chinese companies and not others could be insulated from domestic political pressure.”

Yet it is hard to see how any fund that answers only indirectly, if at all, to investors or (in the case of pension funds) members could ever be free of the threat of political manipulation, be it in the form of SRI or something more sinister, regardless of the path its investments take.

The Montana Board of Investment’s (MBI) March 2003 decision, made in a regular board meeting, to pull all its French investments is an example of a particularly sinister form of political investing or, in this case, divesting. I just looked up the minutes of that board meeting, and some of the best lines are worth sharing.

The MBI’s decision came after a pension fund member had moved “that the Board sell all French company stock and not purchase any more French stocks until such time as a future Board determines that France has proven it is a friend of the United States again.” The inspiration for the member’s move was apparently “a statement made by President Bush following the ‘9/11’ terrorists attacks that ‘you are either with us, or with the terrorists.’”

The board thereafter managed to convince itself that it would not be in breach of its fiduciary duties if it divested in France since (in the words of one board member), “[T]he backlash [against France] could be significant. The media has reported French goods not being purchased; French wines not being purchased, Evian water not being purchased. People are protesting against the French. There is a risk in holding French company stock.”

The decision to divest, which was reversed in October of that year, is reported to have cost the MBI’s members $4mn.

Looking at the Times article again, it is interesting, given the general focus in the media on the China Investment Corporation (CIC) as the face (quite literally) of Chinese sovereign wealth, that it focuses primarily on the State Administration of Foreign Exchange (SAFE) and refers to the CIC as the “smaller Chinese sovereign fund.”

UPDATE (June 22): Brad Setser has posted a response to the Times article.

Bloomberg reports that, “Asian central banks may fail to halt a rally in the dollar by selling the U.S. currency, as Treasury Secretary Henry Paulson raises the prospect he will order intervention, Morgan Stanley said.”

Bloomberg reports that, “Federal Reserve Chairman Ben S. Bernanke threw the weight of the central bank behind Treasury Secretary Henry Paulson’s efforts to strengthen the dollar after its 10 percent drop over the past year.”

National Journal writes that, “Speaking in Pittsburgh today [Tuesday] at an event on global trade, Undersecretary David McCormick spoke to the security anxieties many U.S. citizens feel toward foreign investments. His remarks came just one day after Treasury Secretary Henry Paulson used a speaking engagement before the U.S.-United Arab Emirates Business Council in Abu Dhabi to address concerns abroad over just how welcome the U.S. has become to foreign investment.”

Emirates Business 24/7 writes that, “Paulson’s view will be a lot harder to sell to the American heartlands than to an audience in Doha or Abu Dhabi.”

Henry Paulson writes in Abu Dhabi’s The National newspaper that, “As the US urges other nations to open their economies, many in the Middle East ask if we genuinely welcome foreign investment now. Some worry about a general, growing protectionist sentiment in America. They may also worry that US sentiment toward Middle East investment was permanently affected by the Dubai Ports World case. My response is the same as that expressed by President Bush during his Middle East visit two weeks ago - as America seeks to open new markets abroad, we will keep our markets open to investment from private firms and sovereign wealth funds. We reject measures that would isolate us from the world economy.”