Banks in financial difficulty raise capital where they can to boost their balance sheets and to limit the risk of insolvency. US and European banks weakened by the global credit squeeze, which arose from the subprime mortgage crisis, have so far raised some $75 billion (€50 billion) in equity investment. Some Arab and Asian governments provided the new capital, with Citigroup and investment banks, notably Morgan Stanley and Merrill Lynch.
This low-key financial rescue of some of the world's major financial institutions was carried out by some unusual investors. China, Singapore, Kuwait, Abu Dhabi and others, in using their sovereign wealth funds as a state investment arm, have clearly flexed their financial muscles. Such a large investment in western financial assets marks a shift in the global balance of economic and political power. For some of these countries, it signals an important change in their investment strategy.
China's huge trade surpluses and the soaring revenues of the oil-producing states of Middle East have left these countries with large surplus savings available for investment. In consequence, the cash-rich developing world now finds itself investing in the increasingly capital-constrained developed world. This represents a remarkable reversal of roles. A decade ago, any idea that an agency of the Chinese government might rescue US banks in financial difficulty, would be dismissed as fantasy. It would be seen as communism saving capitalism, and rejected by the American public as ideologically unacceptable. Fantasy, however, has become fact, mainly thanks to a decade of escalating American trade deficits, a soaring national debt, and a sharply depreciating dollar.
For years China was happy to invest its huge trade surpluses almost exclusively in US government debt. Now China, like some of the wealthier Middle East states, is seeking to diversify its investment and, some feel, to expand its political influence. Increasingly, these countries are using their sovereign wealth funds to take small equity stakes in large multinational companies.Their aim is to secure a better financial return, and to raise their international profile.
Two years ago the US Congress forced Dubai Ports World to call off a plan to buy five American ports because of political objections to Arab ownership. Three years ago, similar political pressure forced the China National Offshore Oil Corporation to drop its bid for one of America's larger oil companies. In recent months, as China, Singapore, Kuwait and others have taken sizeable shareholdings in US banks, few voices have been raised in dissent. In reality, there were few other options. At the recent World Economic Forum in Davos Qatar's prime minister said his country's investment fund was considering investing €10 billion to buy stakes in American and European banks. The era of the sovereign wealth fund has dawned. Its arrival presents major challenges for both sovereign investors and their recipients, if it is to secure public acceptance and avoid a political backlash.