Swaminathan S Anklesaria Aiyar: Forex

Today, globalisation is equated with economic liberalisation. Of course, the Soviet Union once sought a different sort of socialist globalisation. But the Soviet Union is now gone, and globalisation is seen to be driven by the private sector. Indeed, the critics of globalisation fear that multinational corporations will overwhelm governments and rule the world.

Given this background, something peculiar is happening. With little fanfare, globalisation is now facilitating a massive back-door nationalisation that dwarfs the nationalisation of the Cold War era. The old nationalisation was of domestic companies. The new nationalisation takes the form of governments acquiring corporations abroad. The charge has been led by Asian governments, who have acquired corporate assets worth billions. The finance available for purchases runs into trillions of dollars, enough to take over the biggest MNCs.

This is the result of two new trends. One is the desire of governments with massive foreign exchange reserves to diversify out of low-yielding gilts into equity. The second is the surging appetite of state-owned enterprises in the Third World to acquire foreign assets, sometimes with quasi-political motives.

The big news last week was that China Development Bank and Temasek, state-owned arms of China and Singapore respectively, are acquiring a substantial stake in Barclays Bank. Barclays needs finance for its takeover bid for ABN Amro, a Dutch financial giant.

Instead of borrowing billions for the takeover, Barclays is getting a huge infusion of equity from China and Singapore. This is not unprecedented: last year, Temasek bought a 12% stake in Standard Chartered Bank.

Many governments have set up what are called sovereign wealth funds, to get a high financial return on part of their burgeoning forex reserves. Singapore was one of the first off the block. Norway has long had a sovereign fund to manage its surplus oil revenues.

So have old-time oil exporters such as Saudi Arabia, Kuwait, Qatar and Abu Dhabi. Now Korea and China have started investing. And other new entrants include oil exporters who used to have balance of payments problems but now have such an excess of riches — Russia, Kazakhstan, Azerbaijan, Venezuela, Bolivia, Nigeria and even Angola. India has decided, in principle, to start one too.

Now, most wealth managers seek a diversified portfolio. They spread their risks across a wide range of companies, and have desire to take over any company. So, sovereign funds have not been viewed by the markets or the public as vehicles for foreign takeovers. But that may be about to change.

Delta Two, a fund backed by the Qatar government, has mounted a bid to take over Sainsbury’s, one of the biggest supermarket chains in Britain. The China Development Bank will now have a seat on the board of Barclays, totally unlike the typical portfolio investor. This does not prove that China wants to take over Barclays. Yet if that were the case, it is a good first step.

Sovereign wealth funds are not the only big new buyers. State-owned Asian and Russian corporations are on the prowl. Dubai Ports, owned by the Dubai government, last year took over P&O, a venerable British giant. In the process it acquired P&O’s port operations in the US. This led to a huge outcry in the US about security implications. To assuage US fears, Dubai Ports sold its US operations. But it remains a huge and growing global player. Its chief rival is another government-owned entity, Port of Singapore Authority.

After the fall of communism, many Russian assets were acquired by western companies. The reverse is now happening. Russia has forced Shell out of the Sakhalin oilfield and BP of a major gasfield. These are old-style nationalisations. So are the takeovers of western-owned stakes in oilfields by the governments of Venezuela, Bolivia and Ecuador.

But new-style overseas nationalisation, through foreign acquisitions, is also growing. Gazprom, the Russian gas giant, is buying downstream assets at a frenetic pace in western Europe. General Electric recently decided to sell its huge plastics division, and the winning bidder was SABIC, a government-owned Saudi oil giant.

Chinese companies, usually part-owned by central or provincial governments, are on a buying spree for mineral assets, especially in Africa. The Chinese government has backed this “overseas nationalisation” with foreign loans totalling almost $20 billion, giving it political as well as commercial clout. The Chinese government has also backed takeovers of western companies such as IBM’s personal computer business and Thomson’s electronics business in France.

China has invested $200 million in Blackstone, the private equity giant. This is a small minority stake. It represents just two days of forex accumulation. China’s forex assets are now over $1.2 trillion, and rising at the rate of almost one billion per day! The forex reserves of oil exporters are rising almost as fast.

Till now, this has been a blessing for the west. Asian forex reserves have been invested mainly in the US and European gilts, providing ample funds at low interest rates. Indeed, this is one reason why western countries have managed to grow rapidly in the last five years despite high oil prices.

However, the Asian desire to switch part of reserves from gilts to equity has major long-term implications. Asian and OPEC reserves are so large that their equity stakes in some companies are bound to become very large, and threaten a takeover.

There are already rumblings in the west. Last year, when a Chinese company wanted to take over Unocal, the US refused on strategic grounds. It also refused the Dubai Ports takeover. But a subtler threat could be creeping acquisition.

Protectionist paranoia about foreign investment is not yet sweeping the west. Yet if forex accumulation in Asia and OPEC continues at $2-3 billion per day, the mood will change. We may see a new version of the old Marxist adage: a spectre is haunting Europe, the spectre of Asian takeover.