When Beijing Goes Buying

Alistair Darling take heart: nationalization is becoming rather fashionable. State bailouts of banks are all the rage too. There is just one snag: western institutions are not getting their cash from ministers in London or Washington, but from functionaries in Beijing.

While Britain's chancellor still balks at taking Northern Rock into public ownership, his counterparts in China have no qualms about investing state money in the private sector. This week Beijing bought a 10% stake in the Wall Street blue chip Morgan Stanley; in May it took a slab of the private-equity giant Blackstone. Those two deals, worth just over £4bn, were made by the China Investment Corporation (CIC), a fund set up and run by the government. With over £100bn to burn, it is bound to make more big deals - and big headlines - over the coming year. CIC is one of a new breed of sovereign wealth funds (SWFs) created by nations awash with excess cash from exporting goods or oil. Most oil-producing Arab countries have one, as do Russia, Korea and Singapore, and the funds are estimated to be worth a total of a trillion pounds. The logic behind them is simple: if energy-rich Russia is earning around £425m from exports every day, it naturally wants to invest those dollars for a higher return. But the impact of these new vehicles is far less straightforward, and it has largely been left to economics wonks to worry about them (even now, a Google search for "SWFs" brings up page after page about some graphic-design software). At last, however, they are entering political debate. The IMF is working on a code of conduct for the funds, while the rich nations' club, the OECD, is coming up with guidelines for recipients. Such users' manuals have their place, but on their own they are not an adequate answer to the issues raised by SWFs.

At their most basic level, these funds (which are projected to be worth £7.5 trillion within a decade) embody a shift of economic power from Europe and America to China, Russia and elsewhere. They sum up one of the global economy's problems too: the west is consuming far more than it is producing. SWFs are also a new and very different kind of investor. "Cross-border nationalizations" is how Larry Summers refers to them; a strong phrase from someone who, when Democrat treasury secretary, was full of the joys of globalisation. What worries him and many others is that these investments may not be made for financial returns, but for political ends. After all, commercial considerations are unlikely to be paramount for totalitarian regimes. If Moscow is willing to play politics with an art exhibition supposedly heading to the Royal Academy, what could it do with a chunk of a British energy company?

Free marketeers argue that this is all hypothetical and that sovereign funds have been around for a few decades without causing a fuss. Right on both counts, but Norway and others have typically squirreled them away in a variety of investments - a few shares here, a bunch of bonds there. China, Abu Dhabi and these new SWFs are taking large, powerful positions in a few companies. This is a new kind of capitalism, and the difficulty for the west in responding to it is avoiding knee jerk jingoism. American politicians have already fallen into that trap, by kicking up such a fuss over a Chinese computer firm buying parts of IBM or Dubai taking over US ports. But governments should not be shy about marking certain industries (such as energy) as being of national importance, and off limits to other states.

What about the investor countries? Beijing's surplus cash would be better employed within China. Sorting out basic national problems such as pollution and sanitation would surely be a far better use of state funds than buying stakes in private-equity firms. A sovereign wealth fund may be further demonstration that Beijing has arrived as a major world power, but it does very little for the rank-and-file Chinese.