State Capitalism: Trumping Privatization?

Brad Setser highlights a topic that I haven't given any thought to before. It's on his list of top macro and financial stories of the year (link):

5. Wall Street embraces state capitalism. Privatization: Over. The really big money is now to be made from cross-border nationalization. Transparency, at least from governments with rapidly growing assets: over-rated. Funds that don’t have to disclose their total assets, let alone report to pesky, risk-adverse parliaments are far more fun -- and certainly far more willing to snap up big stakes in distressed banks.

The story of 2007 though isn’t the scale of the increase in the size of sovereign wealth funds.

As of now, the $1 trillion annual increase in the assets of sovereign wealth funds is just a forecast, unlike the $1 trillion plus annual increase in central bank reserves.

Sovereign wealth funds did probably add about $250b to their assets in 2007, but that total is somewhat deceptive. It seems likely that China shifted a bit over $100b from the PBoC's account at SAFE to the CIC's account at SAFE in late December. Without that influx, sovereign wealth funds wouldn't be growing all that much faster in 2007 than in 2006 or 2005. Moreover, about $100b of the overall increase comes from funds that are still managed fairly conservatively: Norway is the most obvious example, but Kuwait has also stayed out of the headlines -- at least so far. Some recent press reports suggest that the KIA now has deal-envy. Almost all the excitement came from the roughly the more aggressive management of the roughly $50b going into the funds of Qatar, Abu Dhabi and Dubai (money that is often leveraged), the redeployment of some of the accumulated profits of Singapore's GIC and Temasek and a couple of small deals from the CIC and two Chinese state banks …

Rather the story is how quickly the Street and the City jumped on the sovereign wealth fund bandwagon -- without the agonizing of say Tyler Cowen, let alone Larry Summers. The world's biggest deal-makers are now convinced that the governments of emerging market economies – along with cash-rich state-owned enterprises -- are the natural owners of a host of US and European financial assets, whether US banks, global securities firms, European toll roads or Australian mining companies.

Remember, Morgan Stanley, Blackstone, Barclays and Standard Bank together account for only about 3% of the total increase in the foreign assets of China's government. The redeployment of China's financial firepower outside the bond market has hardly started.