The Hindu Business Line : Changing patterns in global fund flows

We need to revise our approach to the questions relating to the origin of funds flowing into India, considering that the US and China have a more relaxed attitude. Either we need more funds or we do not. If we do need more funds, we should not put too many obstacles in their path, argues S. VENKITARAMANAN

The early years after the World War saw New York taking over the place as financial capital of the world from London. Capital moved freely out of New York to many countries of the world. No wonder the ‘Big Apple’ became an International Financial Centre. But things have changed radically in the past few decades, especially with the rising oil prices.

Rising oil prices have transferred huge amounts of wealth to oil-producing countries in the Middle East, Russia, Venezuela and Norway being the beneficiaries. Abu Dhabi is one of those enriched as a result at the expense of oil consumers in the US and elsewhere. In this context, the news that Abu Dhabi Sovereign Wealth Fund has invested $7.5 billion in the equities of the troubled Citibank has brought both relief and bewilderment to US financial circles, as the Wall Street Journal of December 3 points out.

Citibank has been in trouble having incurred large losses running into billions of dollars, mainly as a result of the US’s sub-prime crisis and miscalculations by its hedge funds. It is, indeed, interesting that Abu Dhabi’s Fund should think of investing in shares of a distressed bank, like Citibank, however, glorious its past history. Be this as it may, this infusion of resources has been a considerable relief to US financial authorities since the Citibank needed capital input badly.

Question mark

Incidentally, it is worth considering why the Abu Dhabi Fund chose to invest in an apparently declining asset, like Citibank, whose shares have fallen sharply. Maybe it is because the present diminished valuations offer a potentially rich harvest in case Citibank rises to its full potential. Also, the decline of the dollar leads to the valuations appearing even more attractive than they would otherwise.

The fact that an ailing behemoth in US finance has been rescued by an OPEC member is an irony that has not escaped the attention of observers. This is part of the changing global financial scenario. Who would have thought in an earlier era that a country linked like Abu Dhabi, albeit remotely, to a hotbed of jihadi terrorism, should rescue the bulwark of US finance, the Citibank? (Of course, one cannot ignore that the Saudi royal family has a stake in Citibank.)

One recalls how in the 1980s the US was worried about Japan’s purchases of shares in US icons, including such items as Hollywood Picture Companies, Rockefeller Centre and so on. This was because then also the US had a BoP problem, whereas Japan had huge forex reserves arising from large trade surpluses. The situation has tended to repeat itself. Now, with US dollar being cheaper, the US’ assets are being available for grabs. Observers point out that one reason for such purchases is partly because of the tightness of bank finance, which used to help Wall Street firms raise prices of American assets. This development makes them more attractive for foreign buyers.

It is also intriguing that there have been gripes in the US about a foreign invasion when American financial structure badly needs such infusion. It is a case of the victim desiring the attacker’s advances while all the persons around find the development both bewildering and a nuisance.

The Wall Street Journal referred to cites how scarcely two years ago, the Chinese Oil Company CNOOC tried to buy a stake in the US oil company UNOCAL. Strident protests by US Congressional sources helped put off the deal. Similarly, recently the Dubai Port Authority tried to invest in certain US Ports, but that also raised the Congressional hackles. But, of late, foreign Sovereign Wealth Funds having had an easier access is illustrated by foreign acquisition of stakes in Nasdaq Bear Sterns and now the Citibank.

There is inevitability about this process, which is implicit in globalisation. The US cannot simultaneously preach open borders to other countries and close them itself as far as its own assets are concerned. Especially is this the case when the US is currently a net debtor and is in current account deficit.

It is worth bearing in mind that Sovereign Wealth Funds have an army of advisers, who include amongst their experts from well-known Wall Street firms, who help assess the value at risk of the assets on offer in the US and elsewhere.

The availability of resources with Sovereign Wealth Funds is assessed at levels ranging up to $10 trillion. It might go up to $20 trillion to $ 30 trillion by 2020. In such a case, the US will definitely have much to gain by welcoming the entry of such funds to buy its national assets.

Process of scrutiny

In order to answer concerns of politicians and nationalists, the US has instituted a process of scrutiny of whether the intending purchaser is a fit and suitable person. Considerations of national security are brought into the process of analysis. Technology rights also become significant in such transactions.

Access to national companies, such as those in IT, may open intellectual property rights. These are particularly important in companies manufacturing defence equipment. Anyway, the US has to recognise that being a debtor nation, it cannot have the luxury of being too choosy that will amount to turning away fresh capital inflows.

Alongside the news of Abu Dhabi’s investment in Citibank, The Wall Street Journal again features a similar aggressive investment by another Sovereign Wealth Fund — Temasek, Singapore’s Sovereign Wealth Fund. This time, it is investing $ trillion in a China-based Goldman Sachs subsidiary-managed fund. This represents an increase in stake of Singapore’s Sovereign Wealth Fund in China.

Truly, it signifies an increasing willingness of China to encourage two-way flow of funds, even as it increases its own investment in US’ private equity firms and investment banks. China demonstrates a greater flexibility and willingness to access capital nobility than does the US, which, however, unlike China, sorely needs more such inflows.

Lessons for India

What lessons does all this to-ing and fro-ing of global capital flows have for India? In our preoccupation with P-Notes and eagerness to identify the source of funds, we may be putting blocks to the movement of funds from known sources, such as Temasek. I cannot imagine our politicos accepting without much ado the West Asian countries’ infusion of equity into our national banking icon — the State Bank of India — what a contrast to the US!

Above all, we need to revise our approach to the questions relating to the origin of funds flowing into India, considering that the US and China have a more relaxed attitude. Either we need more funds or we do not. If we do need more funds, we should not put too many obstacles in this path. Perhaps, we need to learn a lot more from the Chinese way of handling the increasing flows of resources. Maybe they have some procedural freedom and flexibility, which we may have to introduce. Maybe their fiscal environment promotes a greater recourse to sterilisation and hence tolerance of capital inflows than does ours.

The solution lies in converting our fiscal situation, not stopping inflows which we sorely need to balance our current account deficit, which is increasing — thanks to our appetite for imports of oil and other commodities in general. The flow of funds on an international scale continues apace. We need to re-examine our attitude to such flows in the light of the US and other countries’ experience.