from Follow the Money


February 18, 2008

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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A number of oil exporters have, through their sovereign funds, effectively invested some of the fiscal surplus from high oil prices in troubled US and European banks. The Abu Dhabi Investment Authority has a stake in Citi; Kuwait’s investment authority has stakes in Citi and Merrill, and Qatar’s investment authority is buying Credit Suisse shares as well. A member of the royal family of another Gulf country supposedly is interested in a UBS stake as well.

Singapore’s GIC - which in effect manages some of Singapore’s reserves (though the GIC reports to its own board, not the Monetary Authority) - has invested in a US major bank, has committed funds to a large Swiss Bank and supposedly will be the lead investor in a TPG fund that will invest in the distressed financial sector as well. TPG is a large private equity firm.

Another Singapore Fund - Temasek, which that originally managed Singapore’s domestic state-owned firms but then diversified - has also invested in a big international banks (Standard Chartered), big Chinese banks (China Construction Bank, Bank of China) and a broker-dealer (Merrill). The line separating the GIC (a portfolio investor) from Temasek (a direct investor) is increasingly blurred.

Korea’s investment corporation (KIC) also has invested in Merrill. The KIC reports to a steering committee, is capitalized with funds from the government and manages funds from the Ministry of Finance ($13b, counting the $10b pledged for 2008) and the Central Bank ($17b) -- see its website. It may also be looking to raise funds from Korean pension funds.

China’s Investment Corporation - which is funded by the Finance Ministry by special bond issues but reports to the State Council not the Finance Ministry - has taken a significant stake in a large broker-dealer and, according to the FT’s SWF guru Henny Senders, is the "sole investor" in a JC Flowers fund as well.

And China’s State Administration of Foreign Exchange - which manages China’s foreign exchange reserves and reports to the People’s Bank of China - may be joining the GIC in the TPG fund investing in distressed banks as well. Henny Senders:

The State Administration for Foreign Exchange, an arm of the Chinese government with responsibility for managing the country’s official $1,530bn in foreign exchange reserves, might also come in as a big investor in coming weeks.

There are certainly rumors that SAFE has started to take on more risk over the past year in various ways, but investing in a buyout fund focused on distressed financial sector assets would be a major step in SAFE’s evolution.

It is getting harder and harder to differentiate sovereign wealth funds from central banks. Both now seem to be taking -- directly or indirectly -- significant stakes in big banks and broker-dealers. Central banks are no longer just buying Treasuries.

That said, I am not that surprised that SAFE is taking a few more risks. SAFE wants to show it can generate big returns, and thus there is little need for a large CIC ...

One of the characteristics of China’s state - as Richard McGregor argues - is that different parts of the state often compete against each other.

The common denominator of all these investments is that they come from countries whose governments frankly have way too much foreign exchange, and are still adding to their stockpiles of foreign exchange despite having way more than they need.

I am not just thinking of China.

Why is Singapore adding over $20b to its reserves a year right now?

And it is perhaps time for the government of some oil exporters to experiment with more creative ways of managing -- and sharing -- their oil wealth as well.

UPDATE: SWF radar is right; I should have mentioned SAFE’s investment in Australian bank stocks as well. 

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