IMF’s proposed sovereign wealth fund code ruffles feathers

1 February 2008

The IMF’s effort to craft a voluntary code of conduct for sovereign wealth funds (SWFs) has sparked concern in different parts of the globe. The IMF is developing the code at the instigation of the G7, particularly the US, as concern is mounting about the proliferation and growing size of SWFs and their motives for investment in strategically important businesses (see Update 58).

Writing in the newspaper China Business News in early January, Wei Benhua, the deputy administrator of the State Administration of Foreign Exchange, the Chinese currency regulator, warned against investment protectionism: “There should be no discrimination in the treatment of sovereign wealth funds; the funds of developing and developed countries should be treated the same way.” He also said that China would be “actively involved” in discussions about the code as well as declaring that state investment vehicles should “maintain a high level of information disclosure”.

Likewise, vice-governor of the Saudi Arabian Monetary Agency Mohamed Al-Jasser, has rejected Western concerns about the motives of SWF, saying that the West assumes “the sovereign wealth funds are guilty until proven innocent.” As discussed in an Economist article, the one prominent case where a SWF has been faulted for the negative effects of their investment strategy has not been an Asian or Middle-Eastern SWF, but actually a Western SWF investing in another Western market.

In 2006, the Norwegian SWF, usually cited as the gold standard for transparency and good practice, attempted to profit from the tumbling value of the bonds of Icelandic banks, in the process helping undermine their prices. This was despite the Norwegian and Icelandic governments having “signed a Nordic mutual-defence pact against financial destabilisation.” Norway’s SWF, created to manage the revenues from the country’s oil and gas exports, is driven solely by profit motives and its managers saw an opportunity they felt compelled to take because of their mandate to maximise returns.

Transparency of the investment funds has become a key battleground. According to former Singaporean prime minister Lee Kuan Yew, the IMF has already consulted Singapore, Norway and the United Arab Emirates to help set benchmarks for the code. But Lee said that Singapore’s SWFs would not be releasing information about each individual investment and would instead release aggregate data about investments by sector. “We’re not going to disclose just how much, year by year, we make or we lose because that’s none of their business. What they want to know is, ‘Are we manipulating the market?’” He was sanguine about the prospects of influencing China’s new SWF.

Western worry over sovereign funds has only increased with the purchase of large stakes in US investment banks by SWFs from Kuwait, Singapore, Abu Dhabi and China. The topic has been the centre of discussion in both academic and official circles. Even US presidential candidates are lining up to act tough. In a debate, Democratic party candidate Hilary Clinton said of the funds: “They need to be more transparent. We need to have a lot more control over what they do and how they do it. I’d like to see the World Bank and the International Monetary Fund begin to impose these rules.”

Others are not so certain. Senior management of the Canada Pension Plan Investment Board have complained that the SWF net is being cast too broadly, sometimes including them despite the fact that the board is a “a purely return-driven professional investment management organisation” to invest the social security resources of the country. Management of the pension fund might want to talk to Canadian finance minister Jim Flaherty, who declared: “We do need to deal with the questions which arise with respect to the sovereign wealth funds. … I think we could benefit from a set of principles.”