Last November, as many American banks suffered through the subprime lending crisis, an unlikely savior emerged for Citigroup. One of the largest financial companies in the world and one of the hardest-hit institutions in the mortgage meltdown, the bank was in desperate need of cash. As recently as a year ago, that savior would likely have been a private equity fund, if not the federal government itself. This time, though, the savior hailed not from Wall Street or Washington, but the Persian Gulf. The Abu Dhabi Investment Authority, a fund controlled by a tiny city-state in the United Arab Emirates, agreed to provide the banking giant with a much-needed capital infusion–to the tune of $7.5 billion.

The Abu Dhabi investment was just a start. A fund run by the Chinese government recently purchased 10 percent of Blackstone, one of the most prominent American investment management firms. Kuwait’s fund took a stake in the European Aeronautic Defense and Space company, an air and space (and military) giant, while in 2007 Dubai bought both luxury retailer Barney’s and a 19.9 percent stake in the Nasdaq stock market. According to Morgan Stanley, funds run by individual governments invested over $40 billion in global financial institutions between April and December 2007 alone. Among other deals, in December Singapore’s $100 billion fund bought a 9 percent stake of giant Swiss bank UBS for almost $10 billion, purchased a stake of Merrill Lynch, and announced it would invest some $1 billion in a new private equity fund created by Goldman Sachs. In October, a Dubai fund purchased 10 percent of Och-Ziff Capital Management, a leading American hedge fund. In September, Qatar’s fund acquired 20 percent of the London Stock Exchange, and that same month Abu Dhabi’s investment arm bought a $1.35 billion share of Carlyle Group, another leading private equity firm known for its political connections, counting at times George H.W. Bush, John Major, and James Baker III as senior advisers.

These sovereign wealth funds (SWFs)–state-owned investment corporations that buy up financial assets  like companies, stocks, bonds, and property, often using funds from national reserves–have been around for decades. But over the past five years they have mushroomed in size and exploded onto global markets, making rapid-fire purchases around the globe and spawning imitators in nearly every country with spare wealth on its hands. Many of the SWFs hail from oil producers, whose reserves are skyrocketing as the price of petroleum rises; other SWFs come from leading exporters like China and Singapore, which enjoy massive trade surpluses. Today, roughly two dozen nations have SWFs, and they hold as much as $3 trillion in international investments; by comparison, the much-vaunted hedge fund sector controls approximately $2.5 trillion. Abu Dhabi’s fund, the biggest in the world, alone controls an estimated $1.3 trillion in assets, and eight other SWFs hold over $100 billion. And SWFs will only become more powerful: According to a study by Morgan Stanley, they could control some $12 trillion by 2015 and nearly $30 trillion by 2022, which would make them among the biggest financial players in the world. And, as the almost-daily headlines attest, U.S. banks and other institutions are happy to take their money. As financial historian Charles Geisst told the Financial Times in January, “Not since before World War I have companies gone looking for foreign capital as much as they are now.”

Abu Dhabi’s investment in Citigroup immediately sparked fierce debate in Congress and the media. Some charged that Citigroup was selling a stake in the nation’s financial stability to an opaque fund from a nation, the UAE, which has at times been a fickle American ally. A few even called for tighter restrictions on how much foreign entities could invest in American financial institutions. On the eve of Kuwait’s massive new investment, New York Senator Chuck Schumer, a senior member of the Senate Banking Committee, said: “Because sovereign wealth funds, by definition, are potentially susceptible to non-economic interests, the closer they come to exercising control and influence, the greater concerns we have,” and he hinted that he may call for tighter regulation of foreign financial investments. And in January the Senate ordered the Government Accountability Office (GAO) to examine, among other questions, how much money SWFs possess and how they structure their investments. Indeed, the accumulation of capital by national governments is creating concerns across the globe, sparking a possible protectionist backlash from Europe to America to Thailand. In January, French President Nicolas Sarkozy publicly warned that Paris would protect French assets from “extremely aggressive sovereign funds.” And even Undersecretary of the Treasury David McCormick, a high-ranking official in a remarkably pro-market administration, told the Financial Times in January, “The growth of these funds and increased levels of their investment does raise legitimate questions about how we can ensure that that investment continues to be commercially driven.” Such a backlash is even more worrying in an era when publics in Europe and the United States are souring on free trade and globalization, and in which the Doha round of multilateral World Trade Organization negotiations now shudders on life support.

But for all the opponents of the Abu Dhabi purchase and other deals, SWFs have their supporters, too–and not just in Beijing and Moscow. Free-market ideologues defended the Abu Dhabi deal by arguing that its Investment Authority was no different than any other private investor and that, after all, Citigroup really needed the money. “Sovereign Wealth Funds No Cause for Panic,” argued a “WebMemo” from the conservative Heritage Foundation. “Policymakers should not consider stricter investment controls in the wake of Abu Dhabi’s purchase.” The White House has also been generally supportive. In a recent article in Foreign Affairs, Deputy Treasury Secretary Robert Kimmitt argued, “Sovereign wealth funds may be considered a force for financial stability.” And undoubtedly having in mind the UK’s aggressive courting of SWF money, Treasury Secretary Henry Paulson recently declared, “We welcome foreign investment in the United States from sovereign wealth funds.”

In truth, neither argument makes complete sense. Sovereign wealth funds are starkly different than other types of investors; they reveal little information about their operations, even less than other new, relatively unaccountable financial structures like hedge funds and private equity. Worse, they are government funds buying up leading companies in other nations. Without improvements in transparency, no one knows whether they make these purchases for purely market reasons, or for other, political reasons. On the other hand, private investors–including SWFs–from many countries hardly on friendly terms with Washington, like Saudi Arabia and China, have had substantial holdings in the United States for years. So if Abu Dhabi’s or Singapore’s investment arm plays by American laws, why would it be any more of a threat? Given SWFs’ amounts of wealth, the funds actually could provide a massive global financial opportunity, capital focused on long-term investing and that could right some of the imbalances in the global financial system.

With developing nations getting richer, and U.S. companies desperate for more investment, SWFs are an inevitable part of the emerging global financial infrastructure. The question is not whether they should exist or not, but how they should be controlled so that the world benefits from them. Right now, SWFs operate largely outside the rules of the global marketplace. Developing enforceable rules will be critical, and the International Monetary Fund (IMF), which has only recently begun to show interest in engaging the funds, will have to take the lead in drafting common standards–the IMF, after all, is the world’s leading financial institution, more explicitly focused on markets than, say, the World Bank or the United Nations. These standards should be agreed to by SWFs and developed countries, including a means of arbitrating SWF-related disputes. The standards cannot be purely voluntary: the funds must be penalized by national governments if they do not follow these rules. Only with real, enforceable standards can SWFs–and developed nations where they invest–avoid a political crisis and keep the global markets working.

The Boom and the Backlash

Some of the most prominent SWFs date back decades, to the era of the first Arab oil gusher. Kuwait’s fund was created in 1960; the Abu Dhabi fund was launched in 1976; and Norway created its sovereign wealth fund in 1990. The United States even has an SWF, the Alaska Permanent Fund, created in 1976 to invest Alaska’s oil windfall. But several factors have sparked a recent SWF boom. With the price of oil rising from just above $10 per barrel a decade ago and flirting with over $100 today (thanks to growing global demand and limited supply), petroleum-producing states are swimming in cash and looking for ways to utilize their newfound wealth. Russia, the largest producer of natural gas in the world, has seen its currency reserves grow from almost nothing in the late 1990s to some $450 billion today. As new players like hedge funds and private equity have emerged in global markets, many companies have become more used to investments from non-traditional financial players, opening the door to somewhat greater comfort with sovereign wealth funds.

Meanwhile, global trade imbalances, the weakening dollar, and the unshakable American consumer, who saves virtually none of his income, have allowed East Asian exporters to amass enormous currency reserves, while other powerful developing nations like Brazil, India, and South Africa have enjoyed some of the longest economic booms in their history. China alone holds nearly $1.5 trillion in currency reserves, and unsurprisingly it recently launched a $200 billion SWF. Japan, which is considering its own SWF, holds over $900 billion in reserves. These Asian giants’ trade surpluses are only going to increase as the dollar falters further and even more manufacturing moves to Asia. While oil producers dominate the longer-standing SWFs, by 2015 the oil countries will likely account for only about half of all SWFs globally.

The SWF backlash has come just behind the buying. Far beyond the concern over the Abu Dhabi deal, the European Union has threatened to restrict SWFs’ investments, and many nations are considering outlawing SWFs’ investments in certain industries considered critical to national security. Some controversial SWF purchases have even sparked near-riots in countries: In 2006, after the Thai government sold off a leading telecommunications company to the SWF in neighboring Singapore, a rival with Thailand for leadership of Southeast Asia, thousands of demonstrators gathered in the streets of Bangkok to protest outside the Singaporean embassy and demand the resignation of the Thai government–a government that soon collapsed.

Some American officials have been just as skeptical of the funds. In a prominent speech earlier this year, Securities and Exchange Commission Chairman Christopher Cox, known during his tenure in Congress as a free-marketeer but also a leading China hawk, warned that SWFs “challenge us to ask whether these many benefits of markets and private ownership will be threatened if government ownership in the economy…becomes more significant.” Others are less diplomatic. Virginia Democratic Senator Jim Webb, a prominent skeptic of free trade, warned that the Chinese investment in Blackstone, which itself has holdings in military funds, could threaten America. “We went through a period in the 1980s where, particularly with the competition against Japan, we saw, as a result of their ability to develop an economic strategy for their companies, that policies were put in place: underpricing, dumping, the design to sort of unfairly diminish the abilities of American companies,” Webb said. “That kind of pales in comparison to what possibly could be the result of these practices if they go out of control, because on the one hand, Japan is an ally, and on the other, China particularly is a competitor, you know, at a minimum.”

Given the preexisting concern in Congress about investments from states like China, Russia, or the UAE–in 2006 Congress blocked the sale of six American ports to a state-owned firm in Dubai, which led to a reform of the committee designed to monitor foreign investments in America–it’s not hard to imagine that once these sovereign wealth funds make even larger purchases in the United States, the House and Senate could become even more critical. Through intense scrutiny, Congress could essentially torpedo any SWF purchase, as it killed the attempted purchase of American oil company Unocal by CNOOC, a Chinese state-linked petroleum firm. With China now a major player in sovereign wealth funds, Beijing’s purchases could push Congress to finally adopt tough trade protection legislation against China, versions of which have floated around the House and Senate for years. The powerful U.S.-China Economic and Security Review Commission, created to monitor the national security implications of America’s trade relations with the People’s Republic, recently recommended that Congress define China’s currency manipulation as an illegal export subsidy and use tariffs against it.

Ultimately, concern about SWFs also could spark growing protectionism throughout the West. Already, polling by the Pew Global Attitudes Project shows that since 2002 public support for trade has declined precipitously in the United States, France, and Britain. If the decline continued, that would be a tragedy. As the largest economy on earth, the United States will be a prime beneficiary of the sovereign funds’ largesse; it is already the biggest destination for SWF money. And numerous studies show that freer trade does promote global growth. If the Doha Round of trade liberalization talks succeeded, for example, it would add over $40 billion to global income annually.

Why We Should Worry

That said, businesspeople, governments, and workers do have reason to worry about SWFs, particularly some of the newer, less transparent funds. Almost all SWFs lack real transparency: Unlike publicly traded companies, most of them–Norway’s and Singapore’s funds are notable exceptions–release little information about their investment strategies, their internal structures, how their leaders decide to vote their shares in companies, or even their current assets and liabilities. Reuters reports that of the ten biggest SWFs, only four even publish detailed annual financial statements, and some have virtually no public face. After Abu Dhabi’s fund invested in Citigroup, reporters from the International Herald Tribune called the fund’s new offices. Unlike an international financial firm with a suave public relations operation, the Abu Dhabi fund never returned the calls. The fund has never even provided outsiders with the actual value of its holdings, and according to the Financial Times, it doesn’t even have a logo, the better to avoid attention. One Emirati official told the Financial Times that Abu Dhabi simply felt no need to be less opaque, arguing, “That’s the whole point of sovereign right”–to do whatever you want.

Because of their secretiveness and closed-shop management style, the SWFs could buy up assets across the world without other investors knowing what they are doing, adding massive uncertainty and volatility to financial markets already struggling to understand investments by private equity, hedge funds, and other new actors. Abu Dhabi’s purchase of a stake in Citigroup, for example, surprised many experts on Wall Street, who had not anticipated the sale. This lack of transparency also will hinder the ability of more open financial management companies to compete with sovereign wealth funds, since they have little idea what they’re battling against–or even how much money the SWFs hold.

Worse, this opacity means no one can tell if SWFs are buying up assets in other nations for purely financial reasons or out of political rationales. Unlike traditionally independent Western central banks like the Federal Reserve, the sovereign wealth funds are not immune from political control. Normally, they are led by senior government officials, who may work hand-in-hand with asset managers who have financial expertise. In China, for example, its executive board is composed of sophisticated managers with experience at the Bank of China and other Chinese investment firms. However, the sovereign wealth fund reports to prime minister Wen Jiabao, and is led by Lou Jiwei, a longtime Communist Party senior official.

These political links are a particular concern because many nations with new SWFs are powerful authoritarian or pseudo-authoritarian states like China, Iran, Venezuela, Kazakhstan, and Russia, all of which are trying to exert leverage over their neighbors and over other developing nations. China is muscling into energy markets in Central Asia, Southeast Asia, and Africa, where its trade with the African continent is growing by some 50 percent annually. Under Vladimir Putin, a resurgent Kremlin clearly sees its giant energy companies–which have come under state control as private operators like Mikhail Khodorkhovsky have been jailed or exiled–as a tool of power to be wielded in Western Europe, the Caucasus, and Central Asia. During disputes with neighboring countries like Ukraine, for instance, Russia has not hesitated to cut off the flow of energy, sending a not-so-subtle message to its neighbors. There’s no reason to believe it wouldn’t use its SWF assets to similar ends.

There is already some evidence that nations like Russia and China
are making overseas purchases that lack a financial rationale. Backed
by government-provided loans, China’s state-linked petroleum companies
have been accused of overbidding for foreign assets in order to lock up
supplies of energy. In the future, if China’s sovereign wealth fund
makes an investment in, say, the Philippines, which Beijing has wooed
as America’s influence there has decreased, how can other investors and
countries know if it made the purchase to make money, or simply to
support the Chinese government’s political aims–or, worse, to
facilitate industrial espionage? If Russia’s state fund buys up media
companies in Central Asia, is it doing so because they are solid
purchases, or because the Kremlin wants to destabilize nearby
democracies?

The growth of SWFs in places like Russia, the UAE, and China might
not only be dangerous for other countries or an impediment to the
efficient allocation of global capital. Within these nations, the
development of a strong state has come with significant official
corruption. Centralizing vastly larger sums of money into the hands of
a government rife with self-dealing may only increase the potential for
corruption: Russia’s deputy finance minister, who had a role in
managing the Russian SWF, was recently charged with embezzling over $40
million.

Since SWFs vest so much power in the state, they also can
marginalize truly private companies within countries, especially if the
funds intend to invest inside their own nations. (China’s fund, for
one, already has announced that it will be plowing one-third of its
money into banking assets at home.) In nations like China, Russia, and
the Persian Gulf states, which have mixed private-state economies,
private companies already struggle to compete with state-linked firms
that enjoy easier access to loans and government favoritism. The SWF
may only tip the balance further away from private enterprise. And
putting more power into state economies does not boost growth: As the
economist Anders Aslund notes, in recent years Dubai, growing at over
10 percent annually, has enjoyed success far beyond that of neighboring
Abu Dhabi, in part because Dubai has supported private enterprise,
while the other petrocrats have just centralized money in stifling
state hands.

But these criticisms do not hide the fact that the emergence of SWFs
could prove an enormous boon for world markets. Particularly at a time
of capital crunch, it is far better for these nations to be investing
their currency hoards in companies around the world than simply sitting
on piles of cash or investing in liquid assets like short-term U.S.
Treasury notes, which can be sold quickly, increasing international
volatility.

Because of their centralized management and ability to hold assets
for long periods, SWFs can also pursue long-term investment strategies.
This allows them to put money into companies and wait out tough times,
critical in an era when many investors demand fast returns. Dubai’s
fund recently invested in Sony, for example, even though the Japanese
multimedia giant has weathered a long rocky patch and corporate
turnaround effort. Abu Dhabi bought into Citigroup at one of the lowest
points in that financial company’s recent history. In fact, some
economists believe that sovereign wealth funds helped steady the global
financial system in the summer of 2007 by adding money at a time when
other investors were pulling out.

More broadly, the rise of SWFs shows that developing nations are
gaining power in global markets, power that also will be reflected in
greater Chinese, Arab, African, and Russian influence in trade and
international financial institutions. The rising influence of
developing nations is bound to upset some in the West, used to running
global markets and institutions like the IMF. But after years of failed
strategies to spark growth in the Third World, just the fact that
Asian, Arab, and even some African nations are becoming more successful
is a development to be welcomed.

Setting Standards

With all the global attention about sovereign wealth funds, surely
the International Monetary Fund, the world’s leading financial
institution, would weigh in on the subject. And in a recent article in
the IMF’s house journal, Simon Johnson, director of the Fund’s Research
Department, did offer his opinions. The problem was, they didn’t
exactly express concern. After summarizing the rise of SWFs and
conceding they will be major “players of the 21st century,” Johnson
seemed utterly blasé about the impact of the funds. “There’s no
apparent reason to see the continued existence of these funds as
destabilizing or worrying,” he wrote. “What should the IMF do about
this situation? There’s certainly no need for dramatic action.” One
doesn’t have to be Senator Webb to feel uncomfortable about Johnson’s
casual approach to one of the biggest challenges to the global
financial system in a generation, since the Fund is considered the
world’s premier financial institution and is not linked to any one
nation.

The IMF has begun to change its tune somewhat in recent months.
Amidst passionate debate about sovereign wealth funds at the 2008 World
Economic Forum at Davos, the IMF reportedly asked Singapore, Norway,
and Abu Dhabi to develop disclosure “benchmarks” for SWFs. But this is little better than the Fund’s previous call for a voluntary “best
practices” code for sovereign wealth funds, outlining principles it
hopes the funds will adhere to, like transparency. The Fund seems
scared to push harder: Anything more than a voluntary code, IMF Middle
East and Central Asia head Mohsin Khan told the Financial Times, would fail: “If you push, [SWF fund nations] will push back.”

This attitude must change. For SWFs to be integrated into global
financial markets in a way that maximizes their benefits–long-term
strategies, large pools of capital–but also prevents protectionist
blowback, the IMF, as the world’s largest global economic institution,
must develop ways to bring them into the global economic architecture
of norms and standards. Rather than creating purely voluntary ideals,
the global financial community, using the IMF as a foundation for
dialogue and resources, must make the common standards binding,
demonstrating there will be consequences if funds do not live up to
these codes. When dealing with muscle-bound nations like Russia and
Venezuela, which understand little other than power, voluntary
standards simply will not be enough.

Many nations with SWFs may complain about these tough measures.
Always sensitive to trade tensions with America, Beijing has already
warned Western nations not to create limitations on its SWF investments
for political reasons. But these complaints can be ignored. Though
China theoretically has weapons it could deploy against Washington,
dumping even a fraction of its dollar holdings would decimate the
American economy–those weapons all have serious recoil. Ruining the
U.S. economy, for example, would ruin Beijing’s biggest customer,
likely stalling China’s export-led growth. With China still a
developing nation struggling with vast socioeconomic inequality, China
needs the United States’ market more than the United States needs China.

In fact, contrary to the opinion of some IMF officials, Western
nations and financial institutions do have significant leverage over
the SWFs. Without access to Western markets and assets, these funds
would have few investment opportunities; even a booming developing
nation like India still has only a fraction the viable opportunities of
a small developed country like the Netherlands. And without buying into
Western companies, these developing nations would have fewer chances to
obtain advanced technologies, learn about high-value manufacturing, or
understand the sophisticated financial management pursued at firms like
Citigroup.

So, what should these new rules look like?

Any set of SWF standards should have several parts, and should be
structured so as to offer both carrots and sticks to the funds. First,
the SWFs would agree to issue quarterly reports, resembling those
released by publicly traded companies. The reports would give other
financial institutions more information about how the SWFs are moving
global markets, and they would reassure politicians that the SWFs are
making purchases for financial, not political, reasons. Detailed
quarterly reports would include information about what assets the funds
are holding, how they fared fiscally over the past three months, and
their overall liabilities. They would also outline the funds’ current
management structure and provide information if the management
personnel changes, crucial elements in comprehending how directly
governments manage these funds.

Besides the quarterly reports, the SWFs would agree to allow
semiregular and published outside audits, to increase global trust in
their operations. The audits would examine the SWFs’ objectives, how
they are managed, their broad investment strategies, and whether they
hold diversified portfolios. Without outside audits, even if SWFs
release reports, many financial institutions and political leaders
would not believe the books of a Chinese or Russian fund. China’s
government is already notorious for massaging or simply making up
financial statistics.

As part of the new standards, the sovereign wealth funds and leading
industrialized countries would agree to select an organization to
mediate SWF-related disputes, if parties involved in a dispute agreed
to it. The organization could be an international arbitration group, a
division of the World Bank or IMF, or even a new entity, as long as it
was perceived as neutral by both developing and developed nations.

It would be in the SWFs’ own interest to sign up to these standards,
since it would make it easier for them to invest around the globe
without sparking a backlash. Openness also would allow their own
citizens to know more about the funds, making it less likely that
average Russians or Chinese or Emiratis would question how and why
their government is investing abroad. Though Beijing or Moscow might
not inherently care what their citizens know about the workings of
government, allowing some degree of openness actually would benefit the
Chinese or Russian regimes. Some Chinese intellectuals have already
started making noise about why Beijing is providing massive amounts of
aid to foreign countries, like Burma, while much of China’s interior
remains desperately poor. Countries like China don’t forget the lessons
of the recent past: In the waning days of the Soviet Union, these kind
of concerns–about why Moscow was funding Eastern Bloc states while the
USSR faced economic hardships–contributed to rising anger at the
government.

The few funds that already demonstrate high levels of transparency
and professional management, like Norway’s, cause little concern when
they buy up assets in other countries. Norway’s fund, which publishes
quarterly reports, is so lauded that Oslo is providing advice to other
nations considering starting their own funds. And there does seem to be
some thaw in the SWF management style: China, for one, has vowed to
hire foreign money managers to help oversee its fund and has promised
to follow “commercial goals” in its foreign investments. Unfortunately, many of the SWFs don’t yet seem to be getting the message. As the New York Times recently reported, officials helping draft a voluntary code of conduct for SWFs say many of the funds do not want to accept even a voluntary code of best practices.

If SWFs do not get the message, there must be consequences. To
ensure the funds sign up to these standards, developed economies should
have a second line of defense against sovereign investments. All
developed nations should create government bodies similar to the
Committee on Foreign Investments in the United States (CFIUS), which
closely analyzes potential investments by foreign entities that might
have national security ramifications for America. At the present,
though Germany, Canada, and a handful of other countries have
considered establishing one, most developed European and Asian nations
do not have such a national review committee. Having these committees
actually can help prevent protectionist backlash, since they assure
politicians that foreign investments are being correctly vetted.

Beyond examining investments for traditional national security
implications, these bodies, including CFIUS, should scrutinize SWFs’
purchases to see if they could be financially or politically
destabilizing. If a Russian fund tried to buy up media outlets in
Georgia or Ukraine, this purchase might not meet the normal definition
of national security, but it clearly could destabilize Russia’s
neighbors. The national committees must require SWFs to openly declare
the criteria they use for making these investments, and to allow
countries with SWFs to permit foreign companies the same amount of
access that these SWFs get when they invest overseas. The national
committees must also reserve the right to deploy the biggest sticks of
all: limits on the stake or the voting shares SWFs can take in
individual companies. And they should develop legislation that
potentially bars SWFs from investing in their nations if these funds do
not demonstrate high standards of transparency, accountability, and
governance.

Tough legislation must be passed quickly, as a storm of factors is
coming together to threaten the SWF boom. Hyperglobalization, which has
filled the SWFs’ coffers, has also frightened many Americans who fear
global integration is costing their jobs and their security. Many of
the major new funds, like China’s and Russia’s, are just beginning to
invest around the globe, and as they buy up more capital, they will
cause even more anxiety. Without serious legislation, these fears of
SWFs could explode. A major election looms in the United States, always
a time when politicians step up their anti-trade rhetoric and bash
potential American adversaries like Beijing. Even the normally centrist
Hillary Clinton has warned that America is losing its “economic
sovereignty,” and has even said she would reassess the North American
Free Trade Agreement, a landmark of her husband’s presidency. Some
Democrats, taking heart from the 2006 victories of trade skeptics like
Ohio Senator Sherrod Brown, would like to push the party in an even
more anti-trade direction. On the right, traditional isolationists have
similar worries about the SWFs. “Will we allow the sovereign wealth
funds of Asia and Arabia, the new investment monsters, to buy up what
they want of our country?” asked Pat Buchanan in January. European
politicians, once unwilling to use the kind of tough action Congress
prefers, too are becoming far more skeptical of China. Besides
President Sarkozy’s warning, European Union Trade Commissioner Peter
Mandelson recently cautioned that China’s “juggernaut is, to some
extent, out of control” and suggested the EU might launch trade
barriers against Chinese goods.

By early 2009, a new American president might have no choice but to
reassess global trade. If real rules on sovereign funds are not in
place before this protectionist storm breaks, there might never be
another chance to deal with them in a calm political environment. And
in an era of instability in global markets, adding yet another risk can
only produce disaster.