NEW YORK -- Government-sponsored investment funds flush with cash have U.S. politicians scurrying to ensure foreigners don't gain control of firms important to national security.
International deals for stakes in U.S. companies are already in full swing, financed by sovereign wealth funds that handle roughly $2 trillion in cash from central bank reserves.
The goal of the funds is to produce higher returns. But U.S. legislators worry that the funds will use their influence to gain access to key industries.
Already, there is legislation on the burner in the U.S. Congress that targets China over its what lawmakers say is an unfair advantage from an undervalued yuan. The cheap currency makes its goods more competitive on global markets.
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With so much money sloshing around in state funds from Saudi Arabia to Singapore, a more sophisticated form of financial protectionism could be on the rise, aimed at guarding certain sectors from foreign influence.
"It's going to become a concern and a real issue," said Donald Straszheim, vice chairman of Roth Capital in Los Angeles. "The reason is, especially in China's case, the numbers are so large."
In May, the nascent Chinese wealth fund bought a 10 percent stake valued at $3 billion in private equity firm Blackstone Group, causing a U.S. lawmaker to call publicly for a federal investigation into the national security implications.
Blackstone has holdings in many high-tech companies. U.S. Senator Jim Webb pointed to documents showing Blackstone's holdings included military and satellite technology companies — assets that Webb said should not be in the hands of China.
Straszheim noted the deal represented only about three days worth of cash flow in China's more than $1 trillion coffer of official reserves.
He expects China to double its cross-border acquisitions over the next few years to $50 billion in 2008 from around $25 billion this year, and then $100 billion in 2009. Cross-border mergers and acquisition activity from the entire developing world has averaged $81 billion annually between 1996 and 2005.
COOLING CONGRESS
While the gaping trade surplus of China, the world's fourth largest economy, has gotten the most attention recently, the biggest generator of sovereign wealth fund money is the oil fields of the Middle East.
Assets at state funds run by oil-exporting countries alone amount to a fifth of the $5.3 trillion in global central bank reserves, according to RGE Monitor.
Like China's state fund, Dubai's Abu Dhabi Investment Authority — likely the largest sovereign wealth fund — was in talks to take a minority stake in a private equity fund.
The United States is not the only country where concerns have arisen. European finance ministers have also taken notice of the growing influence of sovereign funds.
Germany's ruling coalition said last month that it expects to draft a law this year to shield certain German firms from foreign takeover. The U.S. Treasury has been pushing for the International Monetary Fund and the World Bank to issue a list of best practices for sovereign wealth funds.
Last week pressured by protectionist sentiment in the U.S. Congress, President George W. Bush signed a law that increased scrutiny of foreign acquisitions of U.S. companies.
The law requires the Committee on Foreign Investment in the United States, an interagency group charged with determining if acquisitions by foreigners would harm U.S. national security, to spend more time vetting deals. Last year the Committee examined 113 deals worth more than $95 billion, up 73 percent from the previous year.
THE INEVITABILITY OF GLOBALIZATION
Protectionism has long been a pariah of Wall Street.
But for now Wall Street is not as agitated as Main Street. Bob Doll, global chief investment officer for equities at BlackRock Capital, the threat of protectionism does not yet have the teeth to bite into the stock market or cause foreign investors to steer clear of U.S. assets.
"We will at least for now escape the protectionism threat from finding its way to financial issues and financial flows," said Doll, who helps to oversee more than $1 trillion in assets.
Many analysts believe more takeovers of U.S. companies by foreign entities is the next logical step given the tremendous wealth overseas and the depreciating dollar.
Logical, perhaps, but not necessarily easy. Last year a high profile sale of assets in six major U.S. seaports to Dubai Ports World set off a political firestorm as certain lawmakers argued the deal would compromise national security. The deal was initially approved by the CFIUS.
"There's always a threat that people will feel threatened by the prospect that governments or quasi government agencies take large financial stakes in private institutions," said Andrew Karolyi, professor of finance at Ohio State University's Fisher College of Business.
"I'm not sure there's anything anyone can do about it because of the inevitable force of globalization at work here," he said.
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