According to today's New York times, China has already taken more than $600 million in paper losses on its $3 billion purchase of Blackstone shares. Just earlier today one of my students had sent me a copy of a piece by Larry Summers that appeared in the Financial Times warning about the political implications of sovereign wealth funds and suggesting that they needed to be monitored and regulated diffeently than other funds.
My response to him was that we were all getting a little overexcited about the political implications of these funds. It is not at all clear to me that funds whose investment strategies are so likely to be subordinated to political considerations (and political leaders) are going to be highly successful as investors, and I suspect that the losses on Blackstone, like the copper trading losses last year, will be part of a long series of trading disasters that will occur as China -- tremendously inexperienced in money management and risk management -- deploys its out-of-control accumulation of international reserves.
As for whether or not there are likely to be dire political consequences of sovereign wealth funds, I am also skeptical. It's great for the scare-mongering press but neither OPEC, the Chinese nor other Asian central banks have enough to invest to make a serious difference to the political needs of Europe or the US, and anyway when a foreigner owns substantial amounts of assets in your country, you have far more leverage on him than he has on you. I think the only real effect is that until they learn how to do it well and efficiently the result will be a net transfer of wealth from the sovereign wealth funds to the rest of the world.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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January, 2008
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