The Chinese are a-coming!

Am back from a longish trip, hence this gap in my blog writing.

Bear Stearns, Citigroup, UBS, Morgan Stanley.... the list of American firms offering equity stakes to Chinese and Asian firms is growing. Another troubled firm, Merrill Lynch, is getting an infusion from Temasek, the Singapore investment firm.

What does this mean? First, large overseas investors clearly think that the world's investment banks, although in trouble at the moment, are a good investment bet. The sub-prime crisis will end sooner or later- in my view, sooner rather than later- and banks with a fundamentally sound franchise will bounce back.

Secondly, the absence of hostility towards acquisitions by Chinese or Asian firms in blue-blooded western financial firms is striking. That's clearly because large funds are required- and the Chinese seem to have the filthy stuff. Considering how closed China's own financial market is to foreign firms, it is interesting that Chinese funds are now in a position to breeze into western firms. Remember, they acquired an over 10% stake in Barclays during the year and also a stake in Blackstone, the private equity firm.

We are clearly seeing sovereign wealth funds flex their muscles. They are sitting on assets of around $3 trillion and this is expected to rise to $10 trillion soon. Should India too follow suit? There are a couple of issues that economist Gary Becker has highlighted. One, these funds lack transparency and hence monitoring of performance becomes difficult. Secondly, being goverment-owned, they may not deliver the sort of performance one associates with private sector funds.

Becker thinks the funds should simply return some of the excess they have to their citizens as a national dividend or the government should cut taxes. Individuals will then be left with more surpluses which they will manage more efficiently than sovereign funds will manage theirs.

I am not sure about the second proposition, that government ownership is necessarily inimial to efficient fund management- UTI Mutual Fund has done pretty well in recent years. Lack of transparency is the real issue. In India, we do have excess forex reserves but nowhere near what China has. These excess reserves are better spent on developing infrastructure. China has first-rate infrastructure, so it can think of other uses for its reserves. For us, infrastructure spending should be the priority, not passive fund management.