During the 1990’s, Central European countries privatized much of their state holdings, including those in telecommunications, banks, utilities and other companies which would be considered ’strategic’. Ironically, many of these sales were to state-owned companies of western countries, notably in the utilities and telecomms sectors. For example, French and German state-owned utilities were typical acquirers of privatizing Central European utilities.

In general, in my experience, Central European subsidiaries of state-owned companies acted as profit maximizers. The reason: the subsidiary lacked political clout in the parent company’s country. Laid off Czech workers do not vote in France. Therefore, in general, ownership by foreign state entities did not lead to politicized (or rent seeking) behavior.

This assertion deserves two caveats:

First, foreign state ownership does not mean that the portfolio company will not be subject to domestic political pressure. So, the Prime Minister of Hungary could ask the President of France to intercede with a French state-owned company to induce it to forego layoffs at the company’s Hungarian subsidiary. The French President might well comply as a political gesture.

Second, because state-owned companies are typically not profit-maximizers (they maximize political acceptability subject to budget constraints), such companies tend to suffer principal-agent problems. In other words, state-owned companies are more likely to have corrupt management, in my experience. This, in turn, can affect the corporate culture or corporate governance of an otherwise profit-maximizing, foreign subsidiary. If management takes kickbacks at the parent company level, the subsidiary’s management may be emboldened (or indirectly encouraged) to mimic such behavior.

So, the adverse effect of SWF’s in say, France, could be that they erode the corporate governance of the French portfolio company, on the one hand, and open the company to French government interference, on the other.

While both are negative effects, neither rises to the level requiring financial protectionism, in my opinion.

perhaps it’s just me, but are you saying ‘the problem’ is China’s, or the SWF nations’ saving - or the u.s.’s ‘investing’ - and what’s wrong with ‘borrowing’ to ‘invest’ if an entity has a proven capacity to allocate capital to assets that produce a superior return, especially when its’ management and technological know-how contributes to developing those assets? and isn’t that statement in conflict with the ‘profligate consumer’ rhetoric, which seems to imply the that money is ’spent’ rather than ‘invested’ and place the ‘blame’ for global imbalances on those who may be victims?

read your response on the FT forum and agree that each SWF has to be assessed differently. That Dr. Summers is a bit ahead of himself with recommendations which appear to lump SWFs together and place a great deal of faith - and power and prestige along with what would have to be a huge windfall in fees - in the fund managers to do the right thing - at least going from what must be a very brief summary of more in-depth recommendations.

With the many frequent references to the savings in Norway’s SWF, thought the following was interesting: “…Other vulnerable economies include… Norway… Scandinavian households have particularly high levels of debt relative to their assets…” http://www.ft.com/cms/s/d10eedae-3e30-11dc-8f6a-0000779fd2ac.html

2007-08-01 03:23:41 - such statements are better ignored, although I do think it is to the detriment of the blog that brad actually encourages and defends someone who posts that kind of commentary through the use at least dual IDs to further confuse and obstruct constructive analysis.

brad - the number of guest posts would be diminished if at least one regular commenter who signs on with a name was not also using, quite deliberately, the guest moniker as well. That type of abuse of the guest category also has to discourage comments from other who have something to contribute and don’t see the merit in the monikers, but do not want to be affiliated that type of commentary - or anyone who encourages it.

“For instance, America’s Anheuser Busch, producers of the Budweiser beer, over the past decade purchased 100% of China’s Wuhan brewery and 30% of the Tsingtao brewery corporations. Can you imagine the xenophobic uproar from the mainstream US newsmedia if the situation were reversed? Certainly there would probably be violent riots in the streets over how the Chinese will contaminate the US beer supply.”

What a bizarre and offensive caricature of the US and it’s citizens Mr Chiang. There weren’t any riots over the recent pet food issue were there..? There is plenty of foreign ownership of major industries in the US that is barely noiticed including the Japanese owned Sony Pictures.

It is important that the financial asset sold is equity, not an IOU, because when a company is sold, the seller has no further commitment to the buyer. This is what makes the sale of a company like the sale of a capital good generating a stream of output into the future. The stream of dividends from the stock sold may or may not be drawn from the country in which the business was originally domiciled. Private equity can specialise in this kind of thing, like the purchase and sale of Long Term Credit Bank of Japan by Ripplewood or Lone Star’s involvement with Korea Exchange Bank. The sale of IBM’s PC business to Lenovo provides a slightly different example. Obviously, such “enterprise farming” is not going to keep the US afloat on its own, but it can make a useful marginal contribution.

Twofish: While I do not always share your optimism, I do appreciate your reasoned and factual comments on China, which provide food for thought and make a welcome change from the one-sided ranting of certain defenders of China who appear here.

global imbalances certainly reflect savings differentials, along with exchange rate misalignments — but presumably adjustment implies reducing those savings differentials.

the fact that china’s savings gets channeled into demand for equities rather than bonds doesn’t change the fact that china saves more than it invests, or the us less than it invests. and if china thinks the higher returns from the CIC can allow it to avoid making other policy changes — whether fiscal stimulus/ creating a social security system to reduce savings or letting the rmb appreciate, it certainly won’t facilitate global adjustment.

i also to be honest find the protectionism argument over-stated. china is using its central bank to subsidize its exports in an exceptionally big way. that isn’t free trade — not if free trade is meant to imply the absence of government intervention. the question now is how the rest of the world responds to this policy. SWFs are part of that, since holding the rmb down means acquiring foreign assets

Here is a summary of the 2003 Venture Capital regulations which basically allow the formation of foreign investment enterprises venture capital funds. These funds are subject to the same restrictions as all foreign investment.

http://www.paulweiss.com/resources/pubs/Detail.aspx?publication=1076

Here is a schedule of encouraged/restricted and prohibited industries.

http://www.fid.org.cn/en/tzsh/index2-tzsh3.htm

Also the Chinese state *is* going to act as a set of disparate actors. The thing thing about China is that it is so huge that even any one of those actors is going to be enormous. Over the next ten years, you are probably going to see $300 billion in SIC, $100 billion in private equity investment followed by maybe a trillion in mutual funds, insurance fund, provincial and local pension funds.

BTW, *this* is why I think Paulson wants China to unpeg the RMB. With a peg in place, China has to maintain capital controls. To lift capital controls and maintain an independent monetary policy, China has to have a floating currency. Once you lift capital controls, you are going to see tens of billions in fees for investment banks.

But should the West resort to protectionism? Arent they the champions of free trade and globalization? Sadly enuff, the alternative to US is starker still. Disallow these SWFs from investing in the US, and see flight of money invested in US bonds to more attractive places (a la flight of financial engineering to The City of London from Wall Street). As someone noted on this blog, its time to kow-tow to China & Co., coz the US just owes too much to them.

true.

i think the surprise is the way china is going about being a part of the world economic system. that includes the scale of chinese financing of the rest of the world ($500b in CIC/ PBoC foreign asset growth; $350b plus current account surplus). And it includes the extent to which the Chinese state is being a major financial actor — i.e. china acts as a big unitary player, not as a set of separate actors.

I keep returning to $500b. that is going to be close to 1/2 of total state foreign asset growth. it is just a huge number.

as for the CIC, i think the surprise is how aggressive it has been — per the discussion with macroman. I was expecting more index style investment — not participation in IPOs/ big strategic stakes.

“…In 2000, the crisis nations, plus China and Japan, met in Thailand… pledging regional economic cooperation to protect against future shocks. The group identified the creation of a regional bond market as key to the return to prosperity… Governments can support this by establishing uniform procedures of conduct, disclosure, and transparency. Here, too, progress has been meager… “A sense of complacency may bring about another crisis”… persistent political rivalries have contributed to this complacency…” http://www.cfoasia.com/archives/200707-04a.htm

“…The Asian Wall Street Journal went as far as to compare Hutchison to Enron, claiming in mid-February that Hutchison “sweeps billions in contingent liabilities under the rug.”…But Hutchison is guilty of the Journal’s broader charge that it does not give enough detail to explain its complicated finances. Although Hutchison’s annual report ranks as one of the best in Asia… When asked to rate the company’s investor relations, one analyst joked: “It’s improving - at a prehistoric rate…” http://www.cfoasia.com/archives/200203-01.htm