Wealthy sovereign, poor
citizen By Richard Komaiko
Popular concern over the role of sovereign
wealth funds is certainly understandable. In the
aftermath of the US subprime lending fiasco,
sovereign wealth funds have bought considerable
stakes in some of America's most recognized firms.
The pace of these high profile purchases seems to
be about one per week. This has resulted in a
field of alarmist commentary that ranges between
the assertion that America is being "bought up" by
Abu Dhabi, Singapore and China, and the assertion
we are witnessing the eclipse of the American
phenomenon.
Certainly some level of
concern is appropriate. There is something to be
said for transparency, reciprocity and related
concerns that the words "sovereign wealth" elicit
in Washington, but there is an
alternative perspective on
the meaning of sovereign wealth.
Before
America throws in the towel, a few points should
be recognized. First, the size of sovereign wealth
funds must be put in perspective. This discussion
will focus on China, the country whose fund is the
subject of the most heated debate.
China's
foreign exchange reserves have grown to US$1.5
trillion. Concluding that this level of reserves
was excessive, the State Administration of Foreign
Exchange (SAFE) directed $200 billion into a newly
formed fund called the China Investment
Corporation (CIC). The head of the CIC disclosed
that two thirds of its endowment was earmarked for
recapitalizing and restructuring China's domestic
banking sector and the remaining one third,
roughly $70 billion, will be invested in foreign
enterprises.
Most of America's large
financial concerns own assets of about $80 billion
and control assets of several hundreds of billions
of dollars. Berkshire Hathaway, the fund started
single handedly by Warren Buffet, has $46 billion
in cash, and owns assets in excess of $100
billion. If Buffett has on hand almost as much
cash as the total resources that the CIC has
available for investing abroad, it seems fairly
clear that the CIC is not about to alter the plane
of the financial universe. To be sure, it is a
significant player; but there are a lot of
significant players, many of whom are more
significant.
The second point that we must
observe is the nature of the investments made by
sovereign wealth funds. Over the past few months,
sovereign wealth funds have purchased equity in
firms such as Barclays, Bear Sterns, Blackstone,
Merrill Lynch and Morgan Stanley. There is an
obvious pattern here: sovereign wealth funds are
pouring money into Western financial firms. The
irony, perhaps less obvious, is that these same
financial firms are scouring China for investment
opportunities. What is the logic in sending money
all the way across the world to be managed by
someone who's going to send it right back?
Certainly, a Chinese fund manager would understand
conditions on the ground in China better than
someone on Wall Street. So why bother?
This strange situation belies the fact
that despite cultural, linguistic and geographic
handicaps, the money managers of New York and
London remain far and away the most capable
investors in any market in the world. The savvy
directors of the sovereign wealth funds recognize
this fact, which so many Americans seem to have
forgotten. We would do well to view the
investments of the sovereign wealth funds as a
tremendous vote of confidence in the long-term
future of America's economy rather than as a cause
for panic.
It is not at all clear,
however, that these investments are the best use
of resources for citizens of the countries that
are making the investments. Once again, let's take
China as an example. According to recently updated
World Bank figures, China has 300 million citizens
who live at or below the poverty line - living on
$1 per day.
And according to SAFE, China's
foreign exchange reserves stand at roughly $1.5
trillion and are increasing by $1 billion per day.
By most accounts, half a trillion would be
adequate to meet the demands of international
trade. This leaves $1 trillion.
The
government could distribute those trillion dollars
to China's 300 million poorest citizens,
establishing a base of savings of roughly $3,000
per person on their behalf. Several different
schemes could be employed to enable Chinese
citizens to benefit from this money without
violating the government's prohibition against
citizens holding foreign currency.
The
government could go a step further. It could take
$1 billion that flows into SAFE every day and
distribute that money to the people as well. This
would come out to roughly $3 per person per day.
Granted, that's only a few more dollars; but when
was the last time someone offered to triple your
income?
Anyone who has walked the back
alleys of Beijing, seen a factory dormitory in
Shenzhen or traveled through the inland provinces
of China can tell you that the poverty and squalor
in question is beyond anything that most minds can
imagine.
The government has the power to
change that right now. It has an opportunity to
eradicate poverty in China. Wouldn't this be a
more fruitful use of the money than purchasing
strategic equity stakes in Western investment
firms? It doesn't take a philosopher of ancient
China such as Laozi to see the Dao (the way) in
this situation: hoards of starving people on the
left and piles of money on the right cannot stay
separated forever. They must mix and find their
level.
Scholars and analysts say the
economic and political arrangement that China has
pioneered represents an attractive alternative
model to the United States. As the theory goes,
emerging economies around the world have taken
note of China's tremendous success and the fact
that this success was achieved without submitting
to the Washington consensus. Thus, other emerging
economies will be inclined to dismiss Washington
in favor of Beijing. But how novel is the China
model, really? If the China model includes
forgetting about the little guy the moment you
achieve success - ditching fraternity and
compassion for equity and pinstriped suits - then
that isn't a new model. That's called capitalism.
Of course, China enjoys the same rights as
anyone else, including the right to practice
unfettered capitalism. However, there are a lot of
people around the world who hope that, for all of
its lingering socialist rhetoric, China is
genuinely different. I would not be surprised,
disappointed or critical if China dashes those
hopes. But I would like to see otherwise.
Richard Komaiko researches
Sino-American relations, economic policy,
terrorism and national security. He holds a degree
in economics from the University of Illinois and
has studied Chinese language and culture at the
University of Illinois, University of Chicago, and
the Beijing Institute of Education.
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