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Saturday, June 02, 2007

Buying America

Daniel Gross discusses the potential for an increase in foreign ownership of U.S. firms, in particular, the potential for foreign governments to gain control of U.S. based corporations:

Now It's Their Turn to Buy U.S., by Daniel Gross, Commentary, Washington Post: ...In countries that are resource-rich or export powerhouses, governments and government-controlled entities have amassed huge pools of capital. A report issued last month by Morgan Stanley economist Stephen Jen estimated that funds such as the United Arab Emirates ADIA ($875 billion), Russia's stabilization fund ($32 billion) and Singapore's Temasek Holdings ($100 billion) collectively hold $2.5 trillion in assets -- a sum equal to about 18 percent of the value of the S&P 500.

The funds' managers have generally been content to invest in safe assets such as bonds. But in recent weeks, ... General Electric ... sold its plastics unit to Saudi Basic Industries Corp. (SABIC), which is 70 percent government owned... On May 20, the private equity firm Blackstone Group announced that China's State Investment Co. is buying a 10 percent stake for $3 billion.

This phenomenon isn't entirely new. In 1996, Norway's government, planning for a day when its North Sea petroleum bounty would slow to a trickle, began plowing oil revenue into a mutual fund, which is now worth about $311 billion -- or about $67,000 per Norwegian.

China, which has a whopping $1.2 trillion burning a hole in its coffers, has thus far been content to invest in U.S. government bonds and bonds issued by quasi-government agencies such as Fannie Mae. But like any smart investor, it is looking to diversify...

This phenomenon presents opportunities for Americans... Portfolio managers on Wall Street are salivating at the idea that China's government may start rolling cash into the S&P 500 index, for example.

But there are complications. Many of the governments starting such funds have shown a propensity to intervene in their domestic economies and capital markets. And when governments own companies, that creates the potential for geopolitical mischief. Hugo Chavez has used the Venezuelan government's shares of Citgo ... to poke his fingers in the eyes of the U.S. government. In Russia, Vladimir Putin has used state control of energy companies as a political tool against domestic enemies and a diplomatic tool against Russia's neighbors. ...

Americans don't seem to mind that foreigners own 45 percent of U.S. publicly held debt, in the form of low-yield government bonds. After all, as long as we pay the interest, the debt doesn't entitle the foreigners to any say in how we run our business. But stock investors have a say in how the corporations they own are run. ... One could imagine a day when the Chinese or Saudi government is a top shareholder in blue-chip companies.

What's more, the foreign state-affiliated companies tend to cluster in industries that have a bearing on national security: logistics, infrastructure, oil, petrochemicals, airlines. Remember the outrage when Dubai Ports World wanted to buy a British company that operated U.S. ports? Or when the Chinese-government-controlled petroleum company CNOOC tried to buy Unocal in August 2005? Expect more of these episodes. China is thought to be setting up a $300 billion investment fund...

Other concerns arise from the prospect of foreign governments acquiring big chunks of corporate America. Fortune 500 companies such as General Electric are comparatively enlightened employers when it comes to issues of gender, race, sexual orientation and religion. Can anybody say the same about Saudi Arabia? What kind of future might a female Jewish engineer with G.E. plastics have at SABIC?

Some of the fears engendered by rising foreign ownership of American assets are certainly overblown ... [and] the greatest impact is likely to be psychological. The vast sums of money being deployed by foreign governments remind us of two uncomfortable facts, also ironic byproducts of globalization. Partly because of our huge trade deficit, the dollar isn't nearly as strong as it used to be, so many foreigners view the United States as a sort of global bargain basement. And the fact that the big hitters in the game are Chinese, Indian or Saudi reminds us that while the United States is clearly the richest and most powerful nation on Earth, we Americans no longer have the field to ourselves.

I'm not too concerned by this. And it may be that instead of increasing geopolitical and economic risk, a more interconnected world through international trade and foreign ownership of assets decreases the chances of conflict. Martin Wolf:

One of the stories of our era is the way in which vast countries such as China and India are orienting their politics around the goal of prosperity. This forces them to seek domestic and global stability and accept international openness and mutual dependence. They see no benefit in international conflict. It is surely possible that this view of national priorities will take hold in more of the world, including the Middle East. ...

    Posted by on Saturday, June 2, 2007 at 01:08 PM in Economics, International Finance, International Trade | Permalink  TrackBack (0)  Comments (20)

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