“Big Brother & the Holding Company”
Janis Joplin and her band were onto something. The legendary 1960s American rock group seems almost prescient choosing a name that now holds special significance in the world of sovereign investing. Because sovereigns really are big brother…and the “holding company” itself, could be out to get you.
Countries around the world are taking large ownership stakes in American companies, buying up equity shares at record rates. Increasingly, it’s a problem…and presents serious risks to our national interests and our national security.
Historically, central banks invested in low-risk assets as part of normal monetary operations. This generally meant owning local and foreign sovereign debt and gold. (Think China’s investment in U.S. Treasury securities). In recent years, however, governments, either directly or indirectly, have increasingly become major participants in capital markets…investing in virtually all asset classes. This means it’s no longer just a (relatively) simple investment in a country’s sovereign debt, but rather, an investment in the business interests of other nations.
This carries with it a series of conflicts–conflicts the Trump administration has increasingly addressed through its Committee on Foreign Investment–despite a stock market and investment banking community that often prefers to ignore long-term potential security threats in favor of short-term gain.
Consider some of the biggest players around the globe – all looking for their piece of American action: The Central Bank of Norway, for whom I once worked, manages Norway’s Sovereign Wealth Fund. With assets of about $1.2 Trillion, the Fund is one of the largest and holds massive equity positions in a broad range of companies around the world.
Japan’s Central Bank buys stakes in U.S. domestic companies, despite Japan recently revising its own laws to limit the foreign direct investment within its own borders, citing national security concerns primarily tied to China.
Singapore, through its Monetary Authority of Singapore and Temasek, is also on a buying spree.
Meanwhile, the Saudi Arabian Public Investment Fund, flush with cash from the government’s record-breaking sale of a stake in Saudi Aramco, is also investing heavily in the U.S.
But, perhaps, the country of most concern and the one with the most firepower….is China.
The China Investment Corporation (CIC) is China’s investment vehicle of choice. With roughly $1 trillion in assets under management, it is a powerhouse rivaled only by Norway’s fund. As of 2018, U.S. equities made up an estimated 50% of its holdings.
China has yet to prove itself as a “friend” to American business. The country has repeatedly violated trade agreements by engaging in corporate espionage and by stealing (or requiring a “force transfer” of) American intellectual property. Increasingly, China is also under fire for not containing the coronavirus in its early days. And, yet…it wants to own a larger part of the American manufacturing industry and the tech “know-how” that comes with it.
Roughly two years ago, the CIC entered a joint venture with the American banking titan Goldman Sachs in an attempt to increase its investment exposure to the US manufacturing sector. Indeed, the China-U.S. Industrial Cooperation Fund, as the Goldman-China venture was named, was one of the deals announced by President Donald Trump on his visit to Beijing in November 2017. It is said that the Chinese had hoped their partnership with the prestigious U.S. investment bank would minimize its chances at deals being blocked.
So far, no cigar...
Indeed, within a year into the development of the partnership, China complained that CFIUS was unfairly blocking deals.
I’m not surprised and I’d argue we should actually be blocking more — not just from China but any country we consider being able to utilize too much influence. After all, why are we allowing countries we consider antagonists to buy up our manufacturing companies, our tech companies, our drug companies, or any other companies?
The power of the purse, as they say, is quite real. Sovereigns, with their big dollar signs and sizable investments, can influence board appointments, c-suite appointments, corporate policies, and decisions, even where and how capital is deployed. Pulling those levers, enables them to exert political and economic influence.
In fact, risk of favoritism lurks under the surface of these investments. Investing in the debt and equity of large companies, the vehicles of choice, can have unforeseen effects. Sovereign capital lowers the cost of capital to businesses in the sovereign investment universe. Small businesses, generally at a sizeable funding disadvantage, don’t have this access making the cost differential even larger. This is the dynamic engine of the American economy, driving invention, creativity and innovation. Disadvantaging the small business sector of the economy can have broad, negative impact on productivity and competitiveness at home and in the global arena.
And just so we’re clear? I don’t, and you don’t, need to have a foreign head of state or senior functionary big shot influencing decisions in Washington or corporate America any more than they already do!
Moreover, besides being responsible for a country’s monetary policy, central banks are designed to be lenders of last resort when the going gets tough. That is why sovereign holdings were traditionally concentrated in the most liquid of assets–stable
government debt and gold. While sovereign wealth funds may not constitute traditional central banking, these assets still represent enormous pools of illiquidity which could be problematic both for these countries…and, for us…in a real crisis. Imagine the impact of mass liquidation under such circumstances? Such holdings could actually impact the broad decision process of what and how to act in difficult times. Their actions would likely be influenced by the need to protect their investments.
Finally, these sovereigns are not generally subject to American taxes on incomes and gains. Our government, already strapped for cash, loses potential revenues. The enormous, tax-free appreciation of investment in corporate America provides foreign nations with more financial firepower that they can then turnaround and use in competition with our country and our businesses.
Enough. American corporations should be for American investors and, the real friends and allies of the United States of America. It’s time we tell the rock band to exit stage left.