Wealth funds bristle at rich country wariness

DAVOS, Switzerland (Reuters) - Some of the world’s biggest state-run investors said on Thursday they should not be demonized by the United States or other countries after they recently came to the aid of troubled U.S. banks.

Sovereign funds have replaced hedge funds and private equity as a major driver of the global market as they seek to invest huge currency reserves in Western businesses, notably in banks.

On Wednesday, President George W. Bush issued an order to clarify procedures for a U.S. law strengthening national security reviews of foreign deals, at the same time saying the United States welcomed foreign investment.

Sovereign fund managers at the World Economic Forum accused rich nations of labeling them as a risk with no evidence that they were threatening national security or wielding influence.

“It’s like the sovereign wealth funds are guilty until proven innocent,” said Mohamed Al-Jasser, vice governor of the Saudi Arabian Monetary Agency. “Are we creating a straw man before we destroy it? We have to be careful about that,” he told a panel discussion packed with business and political leaders.

Talk in Davos has been dominated by the failings of the U.S. financial system and whether state funds pumping billions of dollars into troubled banks should be welcomed to calm markets.

Funds from the Middle East and Asia have invested tens of billions of dollars in major U.S. banks which badly need capital after huge losses from U.S. subprime mortgage investments.

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The head of the Kuwait Investment Authority, which injected $5 billion into Citi C.N and Merrill Lynch MER.N this month, emphasized all its investments have been commercially driven.

“We look at the bottom line, we don’t look at anything else. We have been passive in all our investments,” said Bader al Sa’ad, managing director of KIA, noting that his fund had been a shareholder in German carmaker Daimler since 1969.

“All this fear about sovereign wealth funds has no real basis ... Why only sovereign wealth funds need to be regulated and not other large investors?”

The finance minister of Norway, which also has an oil-financed state fund, was blunt about the U.S. situation.

“They need money and are, shall I say, in deep shit and can’t manage without foreign capital in many areas of the U.S. market,” Kristin Halvorsen told Norway’s NTB news agency.

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U.S. Deputy Treasury Secretary Robert Kimmitt said Washington did not fear the funds.

“At this point, the history with sovereign wealth funds is they are generating higher investment returns without generating political controversy ... However, the growth in the size and the number of these funds is such that vigilance is required.”

Sovereign wealth funds’ assets are set to reach $12 trillion by 2015, almost 10 percent of all financial assets in the world.

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“These are only an aspect of a much bigger phenomenon. This is an enormous shift of power and influence in the world,” said Singapore Foreign Minister George Yeo Yong-Boon, adding China and India should now join the G7 and G8 world policy talks.

The European Union’s trade chief urged against a rush to draw up new rules for sovereign funds.

“If they respect the governance of those companies or institutions in which they’re investing then I think that we can be fairly relaxed -- no less vigilant but fairly relaxed -- about how we approach any possible guidelines or regulations,” Peter Mandelson told Reuters on the sidelines of the forum.

His approach was backed by the TransAtlantic Business Dialogue, a group of U.S. and European chief executives.

“It would be shooting ourselves in the foot if we were to over-regulate money as it leaves the U.S. or the EU in the form of higher oil prices and is recycled as sovereign investments,” said Jeffries Briginshaw, head of the TABD’s Brussels office.

The finance minister of Russia, whose state energy firms face likely hurdles to investing in the European Union, urged countries to identify any threat before drawing up rules.

“So far we’ve not identified any negatives but we’re already talking about a code to protect us. Let’s first define what could give rise to concern,” Alexei Kudrin said.

For full coverage, blogs and TV from Davos see: here

Additional reporting by the Davos news team; Writing by William Schomberg and David Stamp; Editing by Caroline Drees