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GIC: the view from america

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Kenneth S Chiang

When Western governments start regulating sovereign wealth fund (SWF) investment in banks and other corporations. Attention will likely focus more on the power and ambition of a country than on the size and intention of the SWF it owns.

The Government of Singapore Investment Corporation (GIC) is expected to escape restriction, at least in the United States. Washington does not see Singapore in the same light as it sees China and Russia.

The GIC, managing well over US$100 billion ($ 141 billion), may be one of the world's largest SWFs, but Singapore — with its small population and minuscule territorial size — poses no geopolitical threat and, in fact, is a strategic friend of the US.

Washington, on the other hand, considers re-emergent China more as a competitor, at least in the economic sense, than as a partner. And it regards re-assertive Russia as a challenger to its influence among former Soviet-bloc nations in central and eastern Europe.

Expect regulators to scrutinise Chinese and Russian SWF participation in American corporations very closely and bar any they suspect to be a Trojan horse seeking corporate control to acquire sensitive military technology or a position to blackmail with financial and economic sabotage.

In the American perspective, Singapore probably falls in between Norway — a North Atlantic Treaty Organisation ally with an SWF worth over US$380 billion — and the Gulf states that seek decent returns on their petro-dollars and euros, and that probably have the fewest links in the Arab world to Al Qaeda and other terrorist groups.

Gulf Arab states, however, face the risk of being tarred with the same brush as Saudi Arabia, Libya and Algeria, all of which own sizable SWFs but may be less benign countries in American eyes.

So, if it is likely to have an easier time with regulators than most SWFs, why has GIC decided to become more open than it has been in the previous 26 years since it came into existence?

One (Singlish) word — kiasu, not with a negative connotation, but in the sense of being prudent.

Obviously, GIC feels transparency is a prerequisite in differentiating it from other SWFs, even though the US and other Western governments already consider Singapore a close friend and partner unlikely to be up to any mischief.

Being up front with its motivation and method, especially if these do not move beyond passive, minority commercial investment into major acquisition and corporate control, will distinguish GIC from other SWFs and help it avoid restrictive regulation. In this regard, GIC is way ahead of its counterparts.

Needless to say, by the way, kiasu wasn't strong enough to make GIC disclose details of its operations to a generation of Singaporeans, some of whom had asked how and where the corporation was investing what essentially was their money. But, depending on the extent of disclosure, most would probably welcome GIC's openness as better late than never, whatever the source of the motivation.

So, concern over political pressure abroad is prompting GIC to open up where appeals at home have failed to persuade it. This being presidential election year in the US, such pressure came very much to the fore last month when GIC and the Kuwait Investment Authority together put up US$14.5 billion to help Citigroup cover a US$18 billion sub-prime-related write-down and US$9.8 billion 2007 fourth-quarter losses.

Democratic front-runner Hillary Clinton has urged Congress and the Federal Reserve Board to ask tough questions of SWFs and called for rules requiring greater transparency.

She wants the World Bank and the International Monetary Fund to draft and impose rules. Prudently again, Singapore is one step ahead; together with Norway and Abu Dhabi, it is helping IMF to identify SWF best practices and to draft an SWF code of conduct. Much of what Senator Clinton said may be plain electioneering, as Minister Mentor Lee Kuan Yew suggested in answer to a media question in Riyadh during his visit to Saudi Arabia last month.

Ms Clinton used to favour free trade and investment flow, supporting the North American Free Trade Agreement (Nafta) the US concluded with Canada and Mexico in 1994, during husband Bill's administration.

More recently, in 2003, she helped adopt the US-Singapore free trade agreement in the US Senate. She also voted for other (but not all) FTAs during her Senate tenure. She supported trade normalisation with Vietnam in 2001, and most favoured nation treatment for China in 2000, despite her concern over human rights.

Her voting record on trade and related issues is mixed. As a presidential candidate, she has highlighted concern that Nafta may be hurting American workers and spoken out against tax breaks for corporations outsourcing jobs abroad.

Still, as president she won't want to restrict investment, especially if the sub-prime crisis continues into next year, and American financial institutions such as Citigroup and Merrill Lynch need further capital infusion from SWFs or other foreign sources.

No other candidate, Democratic or Republican, has pronounced publicly on the issue, let alone identified any specific SWF threat, but the worry over foreign takeovers of iconic American corporations remains, along with other fears as the economy slows into a probable recession, employment falls and prices rise.

Senator Barack Obama seems to favour free trade less than she does. His brief Senate record shows he voted for the free trade agreement with Oman in 2006, but opposed implementation of the Central American free trade agreement in 2005. As a proxy indication of his view on SWFs, his FTA voting pattern may suggest as many reservations as does Ms Clinton's.

Mr Obama has spoken out more frequently than Ms Clinton has on the need for labour, environmental and human rights standards in such agreements. Those may be sincerely and strongly held views, but they hint at job protectionism and certainly detract from America's vaunted role as a free enterprise champion.

It is hard to tell how much Mr Obama, if elected, would temper populism with the need to keep trade and investment as free as the current US administration has been able to and is still committed to, as President George W Bush reiterated in his State of the Union address earlier this week.

Implied in Mr Obama's argument is that the American worker, supposedly the most productive in the world, cannot compete with those worldwide.

Certainly, if the White House remains in Republican hands, whether it is Mr John McCain or Mr Mitt Romney who is the victor in November, the coast will be clearer for GIC and other SWFs. Both of them are far more in favour of free trade and investment than their Democratic opponents would ever be.

Senator McCain voted for the US-Singapore FTA as he did similar agreements with a few other countries and regions. He is in favour of Nafta, the World Trade Organisation, Most Favoured Nation status, and "fast track" for President Bush to negotiate FTAs that can pass through Congress without amendment.

Governor Romney, a former businessman, views the emergence of Asia not as a threat but as an opportunity for trade and commerce, as it represents open markets for American goods and services. He has also asked that business people, not politicians, negotiate trade agreements.

Whether GIC has an easier or harder time with US regulators will depend ultimately on how SWF standards are structured and implemented. If indeed Washington gives more weight to a country's power and ambition than it does to its SWF, there could be waivers and exemptions in any statute giving funds like GIC a free pass.

Shorn off any populist overlay over hard political and economic realities, such regulation will likely not stymie GIC's passive, limited, purely commercial — and now increasingly transparent — intentions and interests in the US and other investment landscapes.

Still, a bit of kiasuism does not hurt, as presidential and — it must be added — congressional electioneering proceeds to full blast in an economically uncertain time.

Kenneth S Chiang is a veteran freelance writer based in the United States