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Jul 31, 2007 5:13 pm


BRITAIN WORRIES ABOUT SOVEREIGN WEALTH FUNDS



The American silence on this crucial subject continues but the Bank of England deputy governor warns of the consequences of the rising power of state capitalism. Failure to find a way to tackle the problem, most especially that of Chinese"sovereign wealth funds" may lead to protectionism and the collapse of the current international financial regime. A second FT editorial suggests that China should beware of a backlash.

This morning I heard Joshua Kurlantzick discuss China's Charm Offensive. Clearly, it has its limits. Moreover, it works best when the US looks most formidable and falters when the US falters.

More to the point, it is time to recognize that state capitalism is not compatible with capitalism and the sooner the problem is tackled the better for all concerned.

One more on the subject from FT:

In the short term, it was all too tempting. The savings of Asian and oil-exporting countries have helped fuel the current boom. Their purchases of western government bonds have funded the external deficits created by profligate consumers and lowered real interest rates, boosting asset prices.

But the long-term consequences of the bargain are now clearer. Non-US official entities now hold 30 per cent of all Treasuries and they are, quite rationally, keen to diversify. Sovereign reserves stand at $5,500bn - or 29 per cent of US market capitalization. Governments are moving from lending to the west to owning chunks of it.




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