State capitalism in the global financial market

Sovereign wealth arms of the state government are becoming huge with surplus cash and moving the financial markets at their own pace. This player will create new opportunities, wealth generation, shaking the depressed markets, investment in new ideas and above all take control of the markets with full force and strict discipline. It could be ruthless at times. Sovereign wealth investment decisions are framed at government level taking into account the geo-political, strategic and economic position of the country.
Decisions of UBS chairman to step down after annual meeting in Singapore last year and forcing NIB president in Pakistan to write down his resignation last month are few good examples of the state capitalism. I repeat from one of my previous articles, financial markets and democratic governments are not incompatible. The role of the financial market is to allocate resources to those most capable of using them, while spreading the risk to those most capable of bearing them. State capitalism will drive the markets efficiently with huge funds. Although I strongly believe that markets are semi-efficient.
BIG PLAYERS IN SOVEREIGN WEALTH INDUSTRY
1. China’s China Investment Corporation—CIC
2. UAE’s Abu Dhabi Investment Authority ——-ADIA
3. Qatar’s Qatar Investment Authority—-QIA
4. Kuwait’s Kuwait Investment Funds—-KIF
5. Singapore’s Temasek Holdings
6. Saudi Arabia, Bahrain, Russia, Brazil
STRATEGIC ROLE OF SOVEREIGN WEALTH AND GOVERNMENT’S SUPPORT: In the last 4-years, big banks like Bank of America, Merrill Lynch, Bear Stearns, Barclays, and BIG governments have been rushing to these sovereign funds to rescue their default institutions, to save political governments, to invest in strategic resources with promise of guarantee returns to make attractive for them. I have been closely following CIC of China which has been very active in making strategic investment globally to support various projects. CIC started with $200 billion in 2006, increased to $500 billion to date. It is a huge player in the financial market with investment in Africa, South America, Asia Pacific, North America and Europe. I still remember attending a networking event in Singapore in November 2009, where one of the participants shared interesting insight. CIC made investment in 2009 amounting to $117 billion globally in natural resources like coal, natural gas, oil, copper. The whole world was losing wealth and Chinese sovereign wealth fund CIC was making profit with return on investment about 7-8%. This was quite remarkable taking into account that global economy was imbedded in recession while Chinese were making profit. This point was further validated by Financial Times article in Feb-2010 in which it highlighted the significant achievement of CIC in the volatile market with strategic economic and investment insight.
WINNERS OF SOVEREIGN WEALTH FUNDS from 2009 to 2011: Clearly there are only few winners in this race who are making headlines in the global financial market including CIC of China, Tamasek Holdings of Singapore, ADIA of UAE and Qatar Investment Authority. These funds have made some strategic investments globally with profit horizon much higher than many huge corporations with professional management and enhance business intelligence of the markets. I have very high regards and respect for Tamasek of Singapore for their prescience and strategic approach towards investment.
Investment amount of SWF: $387 BILLION
Number of Countries: 87
Investment deals: 129
Industry investment: Agriculture, base metals, oil, shale gas, financial institutions, chemical, car, nuclear energy, construction, hotels, precious metals, social networking, infra-structure and renewable energy
Continents covered: 5
Rate of return: 7-8% [Expected return]
Sources: World Bank, Financial Times, IMF, Bloomberg, CNN, Economist magazine, Business week, Times, Newsweek. EIU report, Wall Street Journal, Herald Tribune
FINANCIAL MARKETS AND STATE CAPITALISM: Financial markets would have huge impact through state capitalism or sovereign wealth funds. Banks, corporations, governments would swim or sink depending on the strategic insight of the SWF or decision of the state government if they want stakes in that particular company. SWF would eye on natural resources globally going forward so as to keep its competitive edge over other countries. I feel that state capitalism would be very active in their investment in the following areas
I) Agriculture or food items
II) Energy sources like Oil, shale gas, natural gas
III) Infra-structure—-local and global
IV) Trade—financial institutions
V) Metals—precious and base
VI) Health care—-hospitals
State capitalism would make strategic investment because of political maneuvering and global economic dominance i.e.
i) Economic and political harmony
ii) Sustainable GDP
iii) Food security for people
iv) Trajectory for economic growth.
The above points clearly illustrate that the SWF could be beneficial for many countries; regions; areas and people for their economic growth. They will make investment that will enhance the economic activity of the nation, build infra-structure, increase human productivity, living standards, alleviate poverty and support income of the people.

Shan Saeed is a financial market economist with 12 years of solid global market experience based in Asia Pacific. He has graduated from Uni of Chicago, Booth School of Business, USA and IBA Karachi. He can be reached out at [email protected]. Blogs at www.economistshan.blogspot.com