- The Washington Times - Friday, January 25, 2008

DAVOS, Switzerland — U.S. efforts to regulate investments by China, Russia, Saudi Arabia and other nations with huge cash reserves are encountering stiff opposition at the World Economic Forum.

Current and former U.S. officials attending the annual five-day meeting of government, business and academic leaders in the Swiss Alps are pushing for regulation to rein in political interference by governments that control an estimated $2.6 trillion.

“The question is, if we believe in market economies and we work very hard to create open markets and private enterprise — shouldn’t we be concerned with transactions that have an element, albeit a small element, of cross-border nationalization?” asked Lawrence H. Summers, a former U.S. Treasury secretary.

U.S. Deputy Treasury Secretary Robert M. Kimmitt said the International Monetary Fund, the World Bank and the Paris-based Organization for Economic Cooperation and Development are working on standards for recipient nations such as the United States and those in Western Europe.

“At this point, the history with sovereign wealth funds is they are generating higher investment returns without generating political controversy,” Mr. Kimmitt said.

“Importantly, both fund management and investment decisions we have seen have been made on commercial, not political, grounds. We welcome that kind of investment in the United States. We don’t fear such investment,” he said.

Funds from the Middle East and China have invested billions of dollars in major U.S. financial institutions, such as Merrill Lynch, providing much-needed capital to help cover losses from bad investments in subprime U.S. mortgages.

With oil-producing nations continuing to receive windfall profits and China and other Asian economies accumulating cash from export-driven economies, so-called sovereign wealth funds are expected to expand to $12 trillion by 2015, a fivefold increase.

Aleksey Kudrin, Russian deputy prime minister and finance minister, called the concerns “way ahead of the curve.”

Others argued that the funds play a key role in stabilizing world markets over the long term, particularly with fears of a U.S. recession.

“[The funds] have always taken a long-term stabilizing role in financial markets,” said Muhammad al-Jasser, vice governor of the Saudi Arabian Monetary Agency.

“I don’t think there are any difficulties in understanding who is investing where. We should not look at sovereign wealth funds as a risk and a danger,” he said.

A Western European finance executive, with major operations on both sides of the Atlantic, said problems are limited to a minority of foreign investments.

“Ninety percent behave in a commercially normal manner, but 10 percent could behave differently,” the executive said on the condition of anonymity.

“It very much depends on the government of the fund, if it’s democratic or centralized. Clearly the funds in Norway and Singapore are clearly democratic, but that may not be the case in China and Russia or in some Gulf states.”

Nevertheless, the executive said the funds are needed to recycle the huge sums back into the world economy.

In Washington on Wednesday, President Bush signed an executive order to implement a measure Congress passed last year to tighten national security reviews of proposed foreign investments.

Mr. Bush said the new process “reaffirms our commitment to open economies and our policy of welcoming foreign investment and the important economic benefits that such investment can bring.”

Gene Sperling, former chairman of President Clinton’s Council of Economic Advisers, said that the concerns are legitimate.

“That does not mean it should be a common excuse for narrow-mindedness or protectionism, but it is a legitimate issue for policy-makers to raise and I think we’re at the very beginning of what I think will be a very interesting and provocative process, figuring out the global rules of the road for sovereign wealth funds of this size.”

This article is based in part on wire service reports.

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