All around the world, free enterprise is spreading in places where the government used to monopolize economic activity. The Soviet Union, India, and China, all formerly bastions of state control, are now beacons of helter-skelter capitalism and entrepreneurship. It’s a safe bet that in no time in human history has so much of the world’s industrial capacity resided in private hands. For this we can thank the powerful forces unleashed by free trade, the wider adoption of market capitalism, and the growing competition and interconnectedness of the world’s economies.
But globalization is also a joker. The same forces that are stripping governments of their assets are turning those same governments into powerful private-sector investors. We are trading one form of government control for another.
In countries that are resource-rich or export powerhouses, governments and government-controlled entities have amassed huge pools of capital. A research report issued last month by Morgan Stanley economist Stephen Jen estimated that funds like the United Arab Emirates ADIA ($875 billion), Russia’s stabilization fund ($32 billion), and Singapore’s Temasek Holdings ($100 billion) collectively hold $2.5 trillion in assets—a sum equal to about 18 percent of the value of the S&P 500, and more than the amount managed by the entire hedge-fund industry.
These government-controlled funds have generally been content to invest in safe, anodyne assets like bonds. But in recent weeks, the money that Americans ship abroad in such vast quantities for merchandise and petroleum has been washing back onto our shores in new ways. General Electric recently sold its plastics unit to Saudi Basic Industries Corp, which is 70 percent owned by the Saudi government, for $11.6 billion. On May 20, the private-equity firm Blackstone Group announced that China’s State Investment Company was buying a 10 percent stake for $3 billion.
This phenomenon isn’t entirely new. Oil-rich Norway, planning for a day when the country’s North Sea petroleum gusher would slow to a trickle, in 1996 began plowing oil revenues into a giant mutual fund, which has now swelled to about $311 billion—or about $67,000 per Norwegian. With a 40 percent allocation in stocks, the fund owns more than $120 billion in shares around the globe.
China, which has a whopping $1.2 trillion surplus burning a hole in its state coffers, has thus far been content to invest its dollars in U.S. government bonds and bonds issued by quasi-government agencies like Fannie Mae. But like any smart investor, it is looking to diversify. And as the volume of international trade rises, as more shoes and dishwashers are made in China and shipped to the United States, as more (and more expensive) oil is pumped from the sands of Saudi Arabia and shipped to middle-class drivers in India, as Russian nickel producers ship more metal to Brazil, the volume of cash on the balance sheets of governments and government-controlled companies will rise.
This phenomenon presents opportunities for Americans—especially those Americans who own the Blackstone Group or General Electric. In a long-running bull market, such as the one we’re having, profiting is all about finding a greater fool—i.e., a naive, inexperienced investor willing to pay a premium for an already high-priced asset. (Blackstone Group, meet the Chinese government.) Portfolio managers on Wall Street are salivating at the notion that China’s government might start rolling cash into the S&P 500 index, for example.
But there are complications. Many of the governments starting such funds have shown a propensity to intervene in their domestic economies and capital markets. And when governments own companies, it creates the potential for geopolitical mischief. Hugo Chávez has used the Venezuelan government’s ownership of Citgo, the well-known gasoline distributor, to poke his fingers in the eyes of the U.S. government. In Russia, Vladimir Putin has used state control of energy companies as a political tool against domestic enemies and as a diplomatic tool against Russia’s neighbors. Imagine two private-equity firms are bidding on a set of assets owned, controlled, or influenced by the Chinese government. One is the Blackstone Group, of which the government owns 10 percent; the other has no government connection. Which is more likely to have a leg up?
Americans don’t seem to mind that foreigners own 45 percent of the publicly held U.S. debt. After all, so long as we pay the interest on bonds, the debt doesn’t entitle the foreigners to any say in how we run our business. But stock investors have a say over how the corporations they own are run. The business press is filled daily with stories about shareholder activists using small stakes—5 percent, 10 percent—to agitate for changes in management or policy. One could imagine a day where the Chinese or Saudi government is a top shareholder in blue-chip companies.
What’s more, the foreign state-affiliated companies tend to cluster in industry sectors that have a bearing on national security: logistics, infrastructure, oil, petrochemicals, airlines. Remember the outrage sparked when Dubai Ports World wanted to buy a British company that operated ports in the United States? Or when Chinese petroleum company CNOOC, which was controlled by the Chinese government, tried to buy Unocal in August 2005? Expect a lot more of these episodes. China is thought to be setting up a $300 billion investment fund—$300 billion buys you Microsoft, or Coca-Cola, Pepsico, and McDonald’s.
There are other legitimate concerns raised by the prospect of foreign governments acquiring big chunks of corporate America. Fortune 500 companies such as General Electric are comparatively enlightened employers when it comes to issues of gender, race, sexuality, and religion. Can anybody say the same about Saudi Arabia? What kind future can a Jewish, female engineer who works for G.E. plastics expect to have at SABIC?
Some of the fears engendered by rising foreign ownership of American assets are overblown. Foreign companies—even ones controlled by foreign governments—aren’t likely to acquire U.S. companies and then cart off their assets, fire the staff, and ship the jobs overseas. To the contrary, they invest in American firms precisely to gain access to the U.S. market and to the U.S. workforce.
But the greatest impact is likely to be psychological. The vast sums of money being deployed by the governments of formerly Communist regimes remind us of two uncomfortable facts, which are also ironic byproducts of globalization. Thanks in part to our huge trade deficit, the dollar isn’t nearly as strong as it used to be, which means many foreigners view the United States as a sort of global bargain basement. And the fact that the big hitters in the deal game are Chinese, Saudi Arabian, Russian, and Indian remind us that while the United States is clearly the richest and most powerful nation on earth—in part thanks to globalization—we no longer have the field to ourselves.
A version of this piece appears in the Washington Post Outlook section.
