Sovereign Wealth World.(The Talk of the Town)

Between corrupt mortgage brokers, feckless lenders, and risk-happy hedge funds, there's plenty to keep investors and policymakers up at night. But recently a new item has appeared on the list of things to worry about: so-called sovereign wealth funds, which are investment funds controlled by foreign governments. While these funds are not new--they first rose to prominence in the seventies, as a way for Arab states to reinvest their oil money--of late they've become major players in global markets, thanks to the precipitous rise in oil prices and the booming Chinese economy. China's new sovereign fund alone has two hundred billion dollars to invest, while sovereign wealth funds all together control more than two and a half trillion dollars--and could control as much as twelve trillion by 2015. These funds now have the buying power to shape market prices and acquire assets throughout the developed world. Were China's fund so inclined, it could buy Ford, G.M., Volkswagen, and Honda, and still have a little money left over for ice cream.

Not surprisingly, Western politicians aren't thrilled by this prospect. The U.S. recently toughened requirements that any foreign acquisition be vetted by a commission that would assess its impact on national security. Germany has introduced legislation that would permit the government to bar, on national-security grounds, any foreign investment worth twenty-five per cent or more of a company's value. And some E.U. commissioners have suggested that stringent regulations on sovereign wealth funds may be in the offing.

What are people so anxious about? The first concern is obvious: no one wants foreign states, especially those which might be anti-Western, acquiring Western companies that have anything to do with national security or advanced technology. But policymakers also believe that having governments play an active role in the stock market and in the global economy might make the whole system less efficient and productive, since government-run companies would likely think about things other than the bottom line, including protecting the interests of their home country. This situation has put free-marketeers in a peculiar quandary. They usually favor the free flow of capital in the world's markets, but, in this case, supporting the free flow of capital would mean letting governments run American companies, which no free-market economist thinks is a good idea.

Some of the worries about the dangers posed by sovereign funds are overstated. Many of them are investing in foreign stocks because they're looking for higher investment returns, which suggests that they will act much like other investors, and focus primarily on the bottom line. And the funds are aware of the tensions their activities have already raised, and they are unlikely to exacerbate matters with aggressive acquisitions. So ...