The emergence of sovereign wealth funds appears to be rattling the fears of those closer to their shores too. A recent BusinessWeek article writes about the sentiments of Japan:
"...not everybody in Japan will welcome investment from their next-door neighbor. That's partly because Japan and China have a long history of testy diplomatic relations. Beijing's assertion of its growing political and economic might and its efforts to find a home for its huge currency reserves are likely to fan suspicions in Tokyo that the Chinese are trying to buy up Japan's high-tech know-how."
This sounds oh-too-familiar to sentiments in the US, where more stringent rules have already been put in place to assess the impact of large foreign investment on national security. But some fear that the investigations into the investments will take too long, and ultimately hamper dealmaking.
I think the problem lies in having to bargain from a position of weakness. When times are shaky, you just have to get what you can.
In Japan, low returns and weak company profits have alienated hedge funds and fund managers. Goldman Sachs figures that average return on equity for companies listed on the Tokyo Stock Exchange's main section will be around 10.2 percent in the current fiscal year through March, 2008, compared to 20 percent in the U.S. and 15.7 percent in the rest of Asia. In the US, the sub-prime mortgage crisis have bruised many lenders, which would welcome a cash injection ala Citigroup and the Abu Dhabi fund.
The reality is that these funds will play a bigger role in the global investment scene. The question is how and where they will put their money. Unless domestic investors step up to the plate, or regulators curtail these investments, it will be hard to resist their immense purchasing power. That is the big story of the next few years.