[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                      SOVEREIGN WEALTH FUNDS: NEW 
                  CHALLENGES FROM A CHANGING LANDSCAPE 

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON

                       DOMESTIC AND INTERNATIONAL

                 MONETARY POLICY, TRADE, AND TECHNOLOGY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 10, 2008

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-137

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            DEBORAH PRYCE, Ohio
CAROLYN B. MALONEY, New York         MICHAEL N. CASTLE, Delaware
LUIS V. GUTIERREZ, Illinois          PETER T. KING, New York
NYDIA M. VELAZQUEZ, New York         EDWARD R. ROYCE, California
MELVIN L. WATT, North Carolina       FRANK D. LUCAS, Oklahoma
GARY L. ACKERMAN, New York           RON PAUL, Texas
BRAD SHERMAN, California             STEVEN C. LaTOURETTE, Ohio
GREGORY W. MEEKS, New York           DONALD A. MANZULLO, Illinois
DENNIS MOORE, Kansas                 WALTER B. JONES, Jr., North 
MICHAEL E. CAPUANO, Massachusetts        Carolina
RUBEN HINOJOSA, Texas                JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri              CHRISTOPHER SHAYS, Connecticut
CAROLYN McCARTHY, New York           GARY G. MILLER, California
JOE BACA, California                 SHELLEY MOORE CAPITO, West 
STEPHEN F. LYNCH, Massachusetts          Virginia
BRAD MILLER, North Carolina          TOM FEENEY, Florida
DAVID SCOTT, Georgia                 JEB HENSARLING, Texas
AL GREEN, Texas                      SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri            GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois            J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin,               JIM GERLACH, Pennsylvania
LINCOLN DAVIS, Tennessee             STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire         RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota             TOM PRICE, Georgia
RON KLEIN, Florida                   GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida                 PATRICK T. McHENRY, North Carolina
CHARLES A. WILSON, Ohio              JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut   MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana                PETER J. ROSKAM, Illinois
BILL FOSTER, Illinois                KENNY MARCHANT, Texas
ANDRE CARSON, Indiana                THADDEUS G. McCOTTER, Michigan
JACKIE SPEIER, California            KEVIN McCARTHY, California
DON CAZAYOUX, Louisiana              DEAN HELLER, Nevada
TRAVIS CHILDERS, Mississippi

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Domestic and International Monetary Policy, Trade, and 
                               Technology

                 LUIS V. GUTIERREZ, Illinois, Chairman

CAROLYN B. MALONEY, New York         RON PAUL, Texas
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
PAUL E. KANJORSKI, Pennsylvania      FRANK D. LUCAS, Oklahoma
GWEN MOORE, Wisconsin                DONALD A. MANZULLO, Illinois
GREGORY W. MEEKS, New York           WALTER B. JONES, Jr., North 
DENNIS MOORE, Kansas                     Carolina
WM. LACY CLAY, Missouri              JEB HENSARLING, Texas
BILL FOSTER, Illinois                TOM PRICE, Georgia
ANDRE CARSON, Indiana                PATRICK T. McHENRY, North Carolina
MELVIN L. WATT, North Carolina       MICHELE BACHMANN, Minnesota
BRAD SHERMAN, California             PETER J. ROSKAM, Illinois
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
TRAVIS CHILDERS, Mississippi         DEAN HELLER, Nevada




















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 10, 2008...........................................     1
Appendix:
    September 10, 2008...........................................    29

                               WITNESSES
                     Wednesday, September 10, 2008

Drezner, Dr. Daniel W., Professor of International Politics, The 
  Fletcher School, Tufts University..............................    11
Setser, Dr. Brad W., Fellow for Geoeconomics, Council on Foreign 
  Relations......................................................     9
Truman, Dr. Edwin M., Senior Fellow, the Peterson Institute for 
  International Economics; Visiting Lecturer, Amherst College; 
  and Visiting Professor, Williams College.......................     7

                                APPENDIX

Prepared statements:
    Manzullo, Hon. Donald A. and Marchant, Hon. Kenny............    30
    Drezner, Dr. Daniel W........................................    32
    Setser, Dr. Brad W...........................................    44
    Truman, Dr. Edwin M..........................................    62


                        SOVEREIGN WEALTH FUNDS:
                         NEW CHALLENGES FROM A
                           CHANGING LANDSCAPE

                              ----------                              


                     Wednesday, September 10, 2008

             U.S. House of Representatives,
                       Subcommittee on Domestic and
                     International Monetary Policy,
                              Trade, and Technology
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:05 p.m., in 
room 2128, Rayburn House Office Building, Hon. Luis V. 
Gutierrez [chairman of the subcommittee] presiding.
    Members present: Representatives Gutierrez, Maloney, Moore 
of Wisconsin, Meeks, Moore of Kansas, Watt, Sherman, Ellison; 
Paul and Manzullo.
    Ex officio: Representative Bachus.
    Chairman Gutierrez. This hearing of the Subcommittee on 
Domestic and International Monetary Policy, Trade, and 
Technology will come to order. The subject of today's hearing 
is, ``Sovereign Wealth Funds: New Challenges from a Changing 
Landscape.''
    Good afternoon, and thank you to the witnesses for agreeing 
to appear before the subcommittee. I look forward to hearing 
from you.
    This hearing is a follow-up to the joint hearing we held 
with the Capital Markets Subcommittee in March of this year, 
when we focused on some of the sovereign wealth funds that we 
considered to be good actors. I view them as such because they 
seem more transparent and/or they tend to follow good 
governance practices.
    But the sovereign wealth fund landscape is constantly 
changing. New players continue to enter the field, and new and 
different types of investments are being made. And 
international organizations such as the International Monetary 
Fund (IMF) and the Organisation for Economic Co-Operation and 
Development (OECD) are more involved in seeking a universal 
regulatory or best practices framework.
    Just last week, the International Working Group of 
Sovereign Wealth Funds (IWG) announced preliminary agreement on 
a set of voluntary principles and practices that is intended to 
guide appropriate governance and accountability arrangements, 
as well as conduct of investment practices by sovereign wealth 
funds. The IWG, which is comprised of 26 funds, will present 
the guidelines for the IMF's policy-setting committee next 
month.
    Sovereign wealth funds are not a new source of funding. 
They have existed for over 25 years. What is remarkable is the 
recent growth in their number and size. In the last 2 years, 
Saudi Arabia, Russia, and China created large funds. According 
to the 2007 estimates from Morgan Stanley, the largest 
sovereign wealth fund, the Abu Dhabi Investment Authority, 
controls around $875 billion in assets.
    Although size estimates of sovereign wealth funds are 
hindered by the fact that they are often not transparent, the 
IMF estimates that sovereign wealth assets worldwide are 
somewhere between $1.9 trillion and $3 trillion. And private 
financial institutions have estimated that sovereign wealth 
fund assets will reach $10 trillion to $15 trillion by 2015.
    Whether these are considered large or small figures depends 
on the metric used. The $3 trillion estimate surpasses the $1.5 
trillion managed by hedge funds worldwide, but it's dwarfed by 
the $53 trillion managed by institution investors like pension 
funds and endowments. Regardless of how they are measured, 
sovereign wealth funds are already large enough to be 
systemically significant. I expect them to grow larger over 
time in both absolute and relative terms, especially with the 
increasing worldwide demand for commodities.
    In my opinion, a discussion that the impact of this growth 
may have on the U.S. and global financial system is required. 
Obviously, sovereign funds represent a growing percentage of 
foreign investment in the United States, especially in the 
financial services industry.
    Over the past year, sovereign funds have invested more than 
$40 billion in Wall Street's biggest players, including: the 
Abu Dhabi Investment Authority's $7.5 trillion in Citicorp in 
November; Merrill Lynch's $4.4 billion investment; the China 
Investment Corporation's $5 billion investment in Morgan 
Stanley in December of 2007; its investment in Visa's IPO in 
March of 2008; and lately, the Abu Dhabi Authority's $800 
million purchase of a 75 percent stake in ownership of the 
Chrysler Building in New York City.
    The purpose of today's hearing will be to discuss recent 
changes, both approved and proposed, in the regulation of 
sovereign wealth fund investment and practices--in particular, 
changes Congress made to the CFIUS process in 2007 and the IWG 
agreement I mentioned.
    After the issues raised at the joint subcommittee hearing 
in March, and during the congressional delegation I led to the 
United Arab Emirates in May to meet with leadership of several 
funds, we now need to focus on transparency and good governance 
with respect to specific funds. I have particular concerns 
about the lack of transparency because of the sheer size of 
these investment vehicles.
    By definition, these funds are extensions of the state, and 
should always be viewed as maximizing their nation's strategic 
interests, in addition to maximizing profits. Without a clear 
understanding of the intention of these funds, some of them 
hold the potential to create chaos in the marketplace. These 
concerns are particularly relevant when discussing countries 
like Russia and China, whose security and economic interests 
are not always consistent with our own.
    For this reason, I welcome our witnesses' take on the 
potential financial impact some of the largest funds can have 
on the United States based on the investment decisions and 
sheer size of the fund.
    I also want to focus on sovereign wealth funds that take 
more active approaches to investment, seeking not just to be a 
passive investor, but to control U.S. companies. I look forward 
to hearing from our witnesses, and I yield 5 minutes to the 
ranking member, Dr. Paul.
    Dr. Paul. Thank you, Mr. Chairman. Thank you for holding 
this hearing.
    Once again, we confront the issue of sovereign wealth 
funds, an issue which has become quite important due to the 
large amount of dollars and dollar-denominated bonds held by 
foreign governments, and the fears of these governments, given 
the dollar's precipitous decline over the past few years.
    The past few days have been quite interesting, with 
speculation that one of the reasons for the government takeover 
of Fannie Mae and Freddie Mac was the more than $1 trillion in 
Fannie and Freddie debt held by foreign governments. The threat 
of default on this debt would have undoubtedly had massive 
repercussions on the value of the dollar, and might have 
unleashed the so-called nuclear threat of a massive 
international sell-off of U.S. Government and agency debt.
    The United States Government now finds itself between a 
rock and a hard place. The massive amounts of debt that we have 
allowed to accumulate are hanging over us like Damocles's 
sword. Foreign governments such as Russia and China hold large 
amounts of government and agency bonds, and there are fears 
that, as our creditors, they will exert leverage on us.
    At the same time as the dollar weakens, the desire to sell 
bonds and purchase better performing assets increases, leading 
to fears from others that foreign governments will attempt to 
purchase American national champion companies, or invest in 
strategic industries to gain sensitive technologies.
    In either case, most politicians overlook the fact that we 
are in this situation because of our loose monetary and fiscal 
policy. Actions that would stifle the operations of foreign 
sovereign wealth funds would likely result in corresponding 
retaliatory action by foreign countries against American 
pension funds, and could have the same detrimental effect on 
the economy, as the trade wars begun after passage of the 
Smoot-Hawley Tariff Act.
    Rather than limiting or prohibiting investment by sovereign 
wealth funds, we should be concerned with striking at the root 
of the problem, and addressing inflationary monetary and fiscal 
policy. Debtors cannot continue building debt forever, and we 
now face strong indications that our creditors are eager to 
begin collecting what is owed them.
    It is not too late to correct our mistakes, but we must act 
now, and cannot dally. We must drastically reduce government 
spending and wasteful and disastrous interventions into 
financial markets, and reign in the Federal Reserve's 
inflationary monetary policy. Failing to do so will ensure a 
descent into financial catastrophe. I yield back.
    Chairman Gutierrez. Thank you. Congressman Sherman, you are 
recognized for an opening statement.
    Mr. Sherman. Thank you. First, I should observe that the 
United States has sovereign wealth funds, not at the Federal 
level, but at the State level, where CalPERS and CalSTRS are 
among the biggest players in securities markets, investors in 
private equity, and, with the support of this Congressman, are 
taking into account not just narrow investment criteria, but 
also the political effect and international effect, and effect 
on the Nation of what they do.
    Not only should we be concerned about sovereign wealth 
funds, but we should not assume that non-sovereign foreign 
investors are completely unmoved by political or governmental 
considerations. With a sovereign wealth fund, it is obvious 
that the government of the entity may control the investment.
    But we in the United States operate under our legal system 
to the point where we believe--since so many of us are 
lawyers--that other people operate under the same legal system. 
Under our legal system, everything is published. Every 
governmental effect on investors is ascertainable by looking at 
regulations and laws.
    In most societies, a telephone call from a government 
official can influence investors and private business in a way 
that is so strange to those of us who went to law school, that 
our economists and free trade advocates must insist that it 
could never happen, because it doesn't fit any of their models. 
And where the model differs from the reality, obviously, the 
reality is wrong.
    As Mr. Paul points out, we have a growing debt to 
foreigners. This is best seen in our trade deficit. This trade 
deficit is a direct result of our failed trade policies, and 
our failed trade policies are a direct result of the obtuseness 
caused by a belief that if we change our laws and regulations 
to allow foreign products in, and they change their laws and 
regulations, that they, therefore, have let our products in, 
that if we change our laws and regulations, that means 
government is no longer influencing private sector actors. And 
therefore, if they change their laws and regulations, they have 
also eliminated governmental influence on their private sector 
actors, which is absolutely absurd.
    And therefore, it should not surprise us that there is big 
money in imports. There is big power where there is big money. 
And with that big power, the lie can constantly be repeated 
that if we get other countries to change their laws and 
regulations, that we have accomplished as much as the other--as 
it would be if we changed our published laws and regulations.
    So, I look forward to these hearings and many others. I 
think, ultimately, we are going to see a much further decline 
in the U.S. dollar, because a country with a government this 
bad is not going to retain a currency that is regarded as good. 
I yield back.
    Chairman Gutierrez. The gentleman yields back. I have the 
ranking member of the full Committee on Financial Services, Mr. 
Bachus, who honored me with co-leading the delegation when we 
went out to look at the sovereign wealth funds. Mr. Bachus?
    Mr. Bachus. Thank you, Chairman Gutierrez. As the chairman 
mentioned, we visited Abu Dhabi and Dubai. And I am convinced, 
as a result of that visit and my study of that region of the 
world, that the enlightened leadership and the people of Abu 
Dhabi and Dubai are a really stabilizing and positive influence 
on the Middle East, a very necessary thing.
    And they are also committed to, I believe, some of the same 
freedoms we enjoy. There is a tremendous amount of freedom of 
the press there. We were in a meeting where a young student 
brought up a pollution problem there, in front of one of the 
leading sheiks. And I thought, ``Well, that was pretty daring 
of her.'' And then, in the paper the next day it mentioned that 
problem, and that she had mentioned it. I was very encouraged 
at their commitment to having a free press.
    As for the U.S. economy, we have entered our second year of 
a significant credit crunch. As we all know, growth has slowed 
from its peak, and there remain risks to the economy and 
financial markets. Many individuals and families are suffering 
through difficult times. And last weekend, action to place 
Fannie and Freddie under government control underscores the 
systemic risks that have been created by the unwinding of the 
housing bubble and the subprime lending debacle.
    During this challenging time, sovereign wealth funds have 
played a constructive role in the U.S. economy by injecting 
billions of dollars of needed capital into some of the 
country's largest financial institutions. This has allowed 
those institutions to shore up their reserves, helping to 
soften the blow from the massive write-downs of mortgage-
related securities that have destabilized the banking sector, 
and continue to do so.
    Banks with strong capital are in a much better position to 
make loans to American consumers and businesses, and to help 
get our economy going again. In addition to benefitting the 
U.S. economy, these capital infusions have given sovereign 
wealth funds and the countries that administer them a vested 
interest in the continued health of the U.S. financial services 
industry, and the U.S. economy as a whole.
    Like any other investor, sovereign wealth funds expect 
their investments to succeed. It is in their economic self-
interest, therefore, that the United States businesses in which 
they invest billions continue to prosper.
    Nonetheless, I am aware there are important questions we 
should ask about the growth of these investments, especially 
since some of the most recently established sovereign wealth 
funds are controlled by countries with whom the United States 
has struggled to forge positive economic and strategic 
relations. As I said, Abu Dhabi and Dubai certainly don't fall 
in that group.
    We must, of course, remain vigilant to the national 
security implications whenever countries that do not have our 
best interests at heart seek to invest in our companies. But we 
must also not lose sight of the great benefits that foreign 
direct investment produces for our citizens. What we need is a 
process that is uniform and fair for all investors seeking a 
stake in the U.S. economy, the same way that investments by 
U.S. citizens domestically must be treated uniformly and 
fairly, and the way we expect U.S. investments overseas to be 
treated.
    What would create a more effective investment framework is 
greater transparency on the part of sovereign wealth funds. To 
that end, the preliminary agreement reached last week by the 
IMF and the International Working Group of Sovereign Wealth 
Funds is an encouraging development. While the final details 
are still being worked out, these generally accepted principles 
and practices for sovereign wealth funds should bring about a 
greater degree of transparency and foster a better 
understanding of governance and operations of these entities.
    In conclusion, Mr. Chairman, capital is more mobile than it 
has ever been in the history of the world. And that capital can 
and will travel anywhere. While remaining vigilant to potential 
threats to our national security and our economy and our 
economic interest, our country must act responsibly to maintain 
an environment that is free and open to international 
investment so that all Americans continue to benefit from in-
flows of foreign capital that creates jobs for American workers 
and fuels economic growth here in the United States.
    With that, Mr. Chairman, I again thank you for holding this 
hearing.
    Chairman Gutierrez. Would the gentleman care to be 
recognized? No? Thank you. Well then, I am going to introduce 
the witnesses. First, we have--I'm sorry, the gentleman from 
New York?
    Mr. Meeks. I have a quick statement.
    Chairman Gutierrez. The gentleman from New York is 
recognized.
    Mr. Meeks. Thank you, Mr. Chairman, and good afternoon. I 
want to thank the chairman, my colleague, Mr. Gutierrez, and 
the ranking member, Dr. Paul, for holding today's critically 
important hearing on sovereign wealth funds, the new challenges 
for a changing landscape.
    The rise of sovereign wealth funds as the new power brokers 
in the world economy should not be looked at as a singular 
phenomenon, but rather as part of what can be defined as a new 
economic world landscape. And, as such, it requires careful 
analysis in order to appropriately address any issues that 
arise from the growing prominence of sovereign wealth funds.
    On March 5, 2008, two subcommittees of the U.S. House 
Financial Services Committee held a joint hearing on the 
subject of foreign government investment and the U.S. economy 
and financial sector. The hearing was attended by 
representatives of the U.S. Treasury Department, the Securities 
and Exchange Commission, the Federal Reserve Board, Norway's 
ministry of finance, and the Canadian Pension Plan Investment 
Fund.
    On May 21, 2008, the House Committee on Foreign Affairs had 
a full committee hearing on sovereign wealth funds, the rise of 
sovereign wealth funds, and impacts on U.S. foreign policy and 
economic interests.
    Assets under management of sovereign wealth funds increased 
18 percent in 2007 to reach $3.3 trillion. And most of this 
growth stemmed from an increase in official foreign exchange 
reserves in some Asian countries, and rising revenue from oil 
exports.
    Now, we--as we look at what is taking place here, it is 
clear that Congress has to look at sovereign wealth funds, see 
how it has and can be a help to--I know it has--to some 
municipalities, and see how we can continue to move forward in 
the global economy which we now live in. And I think that we 
have demonstrated a commitment to the issues raised by the 
sovereign wealth funds, and that this committee in particular, 
under the leadership, of course, of Chairman Frank, along with 
the efforts of my colleagues on both sides of the aisle, and I 
expect we will continue to engage in constructive efforts to 
shape our Nation with policies with respect to sovereign wealth 
funds.
    I look forward to visiting nations where we see a lot of--
we went to Norway, and we will be going to others, so that we 
can make sure that sovereign wealth funds is a mechanism to 
help us in the global economy, and not hurt us. I would love to 
hear the testimony of the witnesses this afternoon. Thank you.
    Chairman Gutierrez. I thank my colleague for his comments. 
I will introduce the witnesses now.
    First, we have Dr. Ted Truman, a senior fellow at the 
Peterson Institute for International Economics. Dr. Truman 
previously served as the Assistant Secretary of Treasury for 
International Affairs from 1998 to 2001. Prior to that, he was 
Staff Director for the Division of International Finance at the 
Federal Reserve Board, and before that, an economist on the 
Federal open market committee.
    Dr. Truman has written extensively in the area of sovereign 
wealth funds, including a blueprint for sovereign wealth fund 
best practices, published this year as a Peterson Institute 
Policy brief in international economics. He has also written, 
``The Management of China's International Reserves: China and a 
Sovereign Wealth Fund Scoreboard,'' also in 2008. And, 
``Sovereign Wealth Funds, the Need for Greater Transparency and 
Accountability,'' a 2007 Peterson Institute Policy brief. He 
received his B.A. from Amherst College, and his M.A. and Ph.D. 
in economics from Yale University.
    Dr. Truman, please?

 STATEMENT OF DR. EDWIN M. TRUMAN, SENIOR FELLOW, THE PETERSON 
   INSTITUTE FOR INTERNATIONAL ECONOMICS; VISITING LECTURER, 
   AMHERST COLLEGE; AND VISITING PROFESSOR, WILLIAMS COLLEGE

    Mr. Truman. Thank you very much, Chairman Gutierrez, 
Ranking Member Paul, and other members of the subcommittee. It 
is a pleasure to testify before you today on the challenges 
posed by sovereign wealth funds.
    By way of further introduction, the accountability of such 
funds has been the focus of my research and analysis for the 
past 18 months, as you indicated in your introduction. I use 
``sovereign wealth fund'' as a descriptive term for a separate 
pool of government-owned or government-controlled assets that 
includes some international assets. I include all government 
pension funds, as well as non-pension funds, to the extent that 
they manage marketable assets.
    Sovereign wealth funds may be funded from foreign exchange 
reserves, earnings from commodity exports, receipts from 
privatizations, other fiscal revenues, or pension 
contributions. Table 1, attached to my full testimony, lists 56 
funds of 38 countries.
    No two funds are the same. They have a wide range of 
structures, mandates, and economic, financial, and political 
(primarily domestic, but in some cases international) 
objectives--normally, a mixture. Consequently, it is perilous 
to generalize about sovereign wealth funds and any associated 
threats to the U.S. economic and financial interests.
    With that important qualification, my six summary 
conclusions are:
    First, sovereign wealth funds are here to stay, and likely 
to grow in their relative importance, in particular as 
financial globalization continues.
    Second, the U.S. economy is thoroughly intertwined with the 
global financial system through both the private and public 
sectors here and abroad. The United States, as Congressman 
Sherman indicated, is the number two player in the sovereign 
wealth fund game, in terms of international assets of our 
sovereign wealth funds. It follows that advocates of formally 
regulating sovereign wealth funds should be careful what they 
wish for. Any regulations or other restrictions that are 
applied to foreign sovereign wealth funds properly should be 
applied to our own funds, and would be applied to them by other 
countries.
    Third, the most promising approach to dealing with the 
sovereign wealth fund phenomena is via what I call ``reciprocal 
responsibility.'' Countries with such funds should embrace a 
voluntary set of best practices, along the lines of my 
sovereign wealth fund scoreboard. I hope it has been largely 
incorporated into the Santiago ``generally accepted principles 
and practices'' of sovereign wealth funds that is in the 
process of being adopted. That was referred to earlier. It is 
associated with the IMF. We don't know yet.
    On the other hand, countries receiving sovereign wealth 
fund investments should strengthen the openness of their 
financial systems. At present, more progress is being made by 
countries making sovereign wealth fund investments than by 
recipient countries. My fear is that the financial hurricane 
that would result from an outbreak of financial protectionism 
over sovereign wealth funds would make the recent events look 
like a mere squall.
    Fourth, it is fundamentally impossible to distinguish 
sovereign wealth funds by the degree of political motivation in 
their investment decisions. They are governmental entities, as 
has been pointed out, and governments are political.
    Fifth, sovereign wealth funds do not pose a significant new 
threat to U.S. economic and financial interests. As long as we 
put in place and maintain sound economic and financial 
policies, we control our own destiny. In my view, we have 
adequate mechanisms to address any potential national security 
concerns posed by such funds, or, of much more relevance, other 
forms of foreign government investment in this country.
    Sixth, I am a bit uneasy about the possibility that such 
funds may exercise what I call ``undue influence'' in 
connection with the investments in our financial institutions. 
It is my hope that our existing processes can deal with the 
more heavily regulated portions of our financial system, and 
improvements in the accountability of large hedge funds and 
private equity firms, which I also favor, could help elsewhere.
    Finally, a few words about the sovereign wealth fund 
scoreboard that I have constructed for 46 funds. It is 
summarized in table 2, attached to my full testimony. All 
sovereign wealth funds are not the same. Nor is there one 
cluster of ``good'' funds and another cluster of ``bad'' funds. 
The overall scores in my scoreboard range from 95 to 9 out of a 
possible 100. The simple average score is 56; the weighted 
average score is 51, weighing the funds by their estimated 
foreign assets.
    The funds are in three broad groups: 22 funds with scores 
above 60; 14 with scores below 30; and 10 funds in the middle. 
The top group includes funds of a number of developing 
countries, the middle group includes funds of non-industrial 
countries as diverse as Russia, Mexico, Kuwait, and Singapore.
    The bottom group includes two funds from Abu Dhabi which, 
nevertheless, reportedly have excellent reputations in the 
financial markets, as well as having made a favorable 
impression on Mr. Bachus. Eleven non-pension sovereign wealth 
funds have estimated assets of more than $60 billion. We scored 
nine of these funds. Two are in the top group and two are in 
the bottom group.
    Thank you. I will be pleased to answer your questions.
    [The prepared statement of Dr. Truman can be found on page 
62 of the appendix.]
    Chairman Gutierrez. Thank you, Mr. Truman, so much. Next, 
we have Dr. Brad Setser. Dr. Setser is currently a fellow for 
geoeconomics at the Council on Foreign Relations. He is an 
economist with expertise in finance, global capital flows, and 
emerging economies, and works in CFR's Maurice R. Greenberg 
Center for Geoeconomic Studies, focusing on foreign policy 
consequences of capital surpluses in East Asia and oil 
exporting states.
    Dr. Setser most recently was a senior economist for RGE 
Monitor, an online financial and economic informational 
company. In 2003, he was an international affairs fellow for 
CFR, where he coauthored, ``Bailouts or Bail-ins? Responding to 
Financial Crises in Emerging Economies,'' a book examining 
international monetary policy toward crisis in emerging market 
economies.
    Dr. Setser served in the U.S. Treasury from 1997 to 2001, 
where he worked extensively on the reform of the international 
financial architecture, sovereign debt restructuring, and U.S. 
policy toward the IMF. He ended his time at the Treasury as the 
acting Director of the Office of International Monetary and 
Financial Policy.
    Dr. Setser earned his B.A. from Harvard University, his DEA 
from Institut d'Etudes Politiques de Paris--last word in 
Spanish, not French--and his master's and doctorate's degrees 
from Oxford University.
    Please, Doctor, proceed.

   STATEMENT OF DR. BRAD W. SETSER, FELLOW FOR GEOECONOMICS, 
                  COUNCIL ON FOREIGN RELATIONS

    Mr. Setser. I want to thank Chairman Gutierrez, Ranking 
Member Paul, and the members of the subcommittee for inviting 
me to testify today. It is a particular honor to be on the same 
panel as Ted Truman--my biography, which you read, sort of left 
out that during that entire period when I had those long 
titles, I was basically working for Ted. And it is an equal 
honor to be on the same panel as Dr. Drezner, who was a 
colleague at roughly my level at the Treasury at that time. So 
you have somehow managed to acquire an all-Treasury panel.
    I think over the last few years, capital has flowed in a 
rather unusual way. It has flowed, broadly speaking, from poor 
countries to rich countries, from fast-growing countries to 
slow-growing countries, from countries with appreciating 
currencies that often offered high returns on their financial 
assets to a country with a depreciating currency that provided 
a low return, and often from countries that would be more 
autocratic to countries like the United States, which are 
highly democratic.
    This pattern of global capital flows does not stem, in my 
judgement, from private investment decisions. Private demand 
for the assets of emerging economies has actually been quite 
strong over most of this period. Rather, it reflects an 
unprecedented growth in the foreign assets of many emerging 
economies' governments.
    Now, the U.S. slowdown and the rise in oil prices initially 
intensified this pattern, leading to basically a doubling of 
the pace, in my judgement, of official asset growth from maybe 
$800 billion a year to maybe $1.5 to $1.6 trillion a year. That 
pace has clearly slowed over the last month, as oil prices have 
fallen, and as some of the private capital flows, which I 
mentioned earlier, have reversed. Yet so long as oil exporters 
and countries like China continue to run very large current 
account surpluses, it is reasonable to think this basic pattern 
will continue.
    A sharp fall in central bank purchases of U.S. debt, absent 
an increase in private demand for U.S. debt, leaves U.S. 
interest rates to rise, possibly significantly. Consequently, 
it would not be in the United States's interest.
    On the other hand, the goal of U.S. policy, in my 
judgement, should not be to sustain large deficits through the 
ongoing growth of the funds of central banks and sovereign 
wealth funds. A world where China's government continues to add 
roughly $700 billion a year to its foreign assets, at a time 
when the oil exporting economies are adding a roughly 
equivalent sum, is unlikely to be a world that evolves in ways 
favorable to U.S. interests.
    The debate over sovereign wealth funds should not be 
limited to a debate over where the CFIUS process strikes the 
right balance between protecting U.S. security interests and 
encouraging capital inflows. That leaves out questions about 
whether the same policies--exchange rate intervention, 
stockpiling oil surpluses in government hands--that have fueled 
the growth in sovereign funds also hinder necessary adjustments 
in the global economy. It also ignores the potential shifts in 
geopolitical influence associated with a world that relies 
heavily on other governments for financing.
    And here I would note that the national security 
implications of relying so heavily on central bank demand for 
Treasury and agency bonds to fund the agencies in the U.S. 
deficit warrant at least as much consideration as the national 
security implications of sovereign wealth funds.
    I want to emphasize three specific points. First, the 
majority of the growth in official assets continues to come 
from the growth in central bank reserves, not the growth in 
sovereign funds. And, best that I can tell, the increase, the 
general pattern of global capital flows that flows into the 
U.S. market has not been one which has been going towards risky 
U.S. assets, but rather, one that has been concentrated in the 
least risky of U.S. assets, and that is probably where the 
greatest distortions lie in the U.S. market.
    The $35 billion that sovereign wealth funds invested in 
U.S. banks is less than the average monthly increase in central 
bank holdings of treasuries and agencies at the Federal Reserve 
Bank of New York's custodial accounts.
    Second, it's getting harder, not easier, to evaluate how 
central banks and sovereign funds are influencing U.S. markets. 
More of the growth in central bank reserves is coming from 
countries that do not disclose data about the currency 
composition of their reserves to the IMF. More countries are 
channeling some of their reserve growth through state banks, 
and not reporting that transparently. And many sovereign funds 
report significantly less data--many, not all, there are some 
important exceptions--than central banks.
    And finally, both the set of countries with sovereign funds 
and the investment styles of those sovereign funds are evolving 
rapidly. In the future, the large sovereign funds, if current 
patterns of growth continue, will likely come from Russia, 
China, and Saudi Arabia, not from Abu Dhabi, Dubai, and 
Singapore. I think that's a significant change that warrants 
consideration, as well as the evolution in the individual 
investing styles of some of these countries, and I would be 
happy to take your questions.
    [The prepared statement of Dr. Setser can be found on page 
44 of the appendix.]
    Chairman Gutierrez. Thank you so much. The last panelist is 
Dr. Daniel W. Drezner. Dr. Drezner is a professor of 
international politics at Fletcher School of Law and Diplomacy 
at Tufts University, and a senior editor at the National 
Interest.
    Dr. Drezner has served as International Economist at the 
Treasury Department's Office of International Banking and 
Securities Markets. He also held a research position at the 
Rand Corporation.
    Dr. Drezner has published articles in numerous scholarly 
journals, as well as The New York Times, The Wall Street 
Journal, and The Washington Post on foreign policy and foreign 
affairs. He has provided expert commentary on U.S. foreign 
policy and global political economy for C-SPAN, CNNfn, CNN 
International, and ABC World News Tonight, and is currently a 
regular commentator for Newsweek International and NPR's 
Marketplace.
    He received his B.A. in political economy from Williams 
College, and an M.A. in economics and a Ph.D. in political 
science from Stanford University. We welcome him and his 
testimony. Thank you.

STATEMENT OF DR. DANIEL W. DREZNER, PROFESSOR OF INTERNATIONAL 
        POLITICS, THE FLETCHER SCHOOL, TUFTS UNIVERSITY

    Mr. Drezner. Chairman Gutierrez, Ranking Member Paul, thank 
you very much for the invitation to testify. It's also a 
privilege to be on the same panel with Dr. Setser and Dr. 
Truman. I would add that Brad, I think, is being generous in 
saying we were on an equal level when I was at Treasury. As 
memory serves, he was a few pay grades above me. So it's good 
to know that I can potentially catch up.
    I have submitted my complete written testimony, so I will 
just try to quickly make five points.
    The first is--and again, I agree with Dr. Setser on this--
sovereign wealth funds, in particular, are a symptom, rather 
than a cause of the current macro-imbalances we are 
experiencing. The underlying drivers of what's going on are the 
combination of a low U.S. savings rate; an inelastic demand for 
energy, and imported energy in particular; in some cases 
undervalued currencies, which are leading to persistent trade 
deficits. And, therefore, the primary focus should be on those 
underlying problems, rather than this symptom of sovereign 
wealth funds.
    The second point I would make is that, as symptoms go, 
sovereign wealth funds are relatively benign in their effects. 
In my opinion, most of the concerns about their ability to act 
geostrategically in the United States have been overstated. I 
am not saying these concerns are completely unfounded. I just 
think, as current commentary exists, they have mostly been 
exaggerated, and I would be happy to talk about that further in 
Q&A.
    Furthermore, the increase in sovereign wealth fund 
investment in the United States is leading to more 
interdependence, not so much asymmetric dependence, on the 
United States from the sovereign wealth funds investors. So, 
while there is some constraint in terms of U.S. foreign policy, 
which I will go to in a second, the extent of sovereign wealth 
fund investment in the United States also gives these other 
countries a direct incentive in the stake in our economy.
    And finally, it should be pointed out on this that not all 
sovereign wealth funds see eye to eye. As Dr. Truman said, 
there is a heterogenous group of sovereign wealth funds. The 
largest ones currently are relatively close allies of the 
United States, or at least housing countries that are allies of 
the United States.
    And I think, if anything, we saw from the recent IMF 
meeting in Santiago that there might be a bit of a schism 
between the more mature sovereign wealth funds, such as the 
Kuwait Investment Authority, and, for lack of a better way of 
putting it, the ``arriviste'' sovereign wealth funds coming 
from Russia and China. The older, more mature market funds who 
have operated in Western markets largely uninterrupted and 
largely undisturbed for several decades, are probably upset at, 
suddenly, all the renewed focus of attention.
    Third, I would say the current structures to deal with 
official sovereign investment in the United States are largely 
adequate to the task. The CFIUS and FINSA guards against 
national security concerns were put in place, in some ways, 
anticipating this problem as a result of the Dubai Ports World 
incident. And we, right now, see other OECD countries looking 
to adopt CFIUS-style procedures. So, in that sense, we are the 
template, rather than having to push further on.
    It is too soon to tell whether or not the IMF/IWG process 
for developing the Santiago principles will actually lead to 
improved behavior by sovereign wealth funds. I will say, 
however, that if you are going to articulate a set of 
transparency standards, it is relatively easy for private 
actors to determine whether those transparency standards are 
actually being adhered to. It is always good to have more 
information about these sovereign wealth funds, and so I 
certainly encourage active monitoring and intelligence about 
them. But that is different from more regulation.
    Fourth, Russia and China, in particular, do not have an 
advantage, in terms of their sovereign wealth funds, because 
they are so-called authoritarian capital powers. There is a 
claim sometimes that authoritarian capitalist states can use 
``patient capital.'' They can invest with the idea of thinking 
about the long term, rather than worrying about short-term 
losses.
    I think looking at the behavior of both Chinese and Russian 
investors in the past year flatly contradicts that. There has 
been a significant amount of blowback in China because of the 
CIC's investment purchase of Blackstone last year. You now have 
conspiracy theories among mid-ranking Chinese banking officials 
that the United States has somehow tricked China into buying 
large amounts of debt, with an idea that they are, therefore, 
trapped into holding them. There has been significant blowback 
in Russia over the fact that Russian official investors have 
large amounts of Fannie Mae and Freddie Mac debt, as well.
    Authoritarian countries have short-term political problems, 
just like democratic countries. And so the notion that 
authoritarian countries have an advantage, I think, is 
incorrect.
    Finally, there are undoubtedly some negative effects that 
come from growing sovereign wealth fund investment, and I talk 
about this in my written testimony. First, there is no question 
that U.S. democracy promotion efforts will be hindered. And, 
second, financial globalization looks more and more like a game 
of mutually assured destruction, in that, as Larry Summers put 
it most famously, ``There is now a financial balance of terror 
between capital importing countries and capital exporting 
countries.''
    Now, fortunately, mutually assured destruction can lead to 
a more peaceful coexistence, but it's a relatively nervous 
coexistence, and I would certainly acknowledge that. Thank you 
very much.
    [The prepared statement of Dr. Drezner can be found on page 
32 of the appendix.]
    Chairman Gutierrez. Thank you. The new Cold War. Thank you 
very much. We will now go to questions.
    Dr. Drezner, let me just follow up, since you finished on 
your last point. You wanted to get them all, so you were trying 
to be very disciplined about the clock. I appreciate that.
    Please elaborate just a little bit on the financial 
industries and mutual destruction, and the banking industry and 
their mutual terrors.
    Mr. Drezner. The financial balance of terror, as it were, 
is that, you know, there is that old line that if you owe the 
bank $1,000, that's your problem. If you owe the bank $1 
billion, that's the bank's problem. Something that plays is 
similar here, which is we are the ones that are borrowing from 
sovereign wealth funds, but we have now borrowed so much that 
the countries that are holding our debt also do have a stake in 
our country succeeding.
    We can debate about this. There is no question that these 
countries could pursue what's called the nuclear option, which 
is to sell all of their debt, and to sell all of, you know, 
their equity in U.S. markets. There is no question they can do 
that. But in the same way, during the Cold War, the Soviet 
Union could have launched all of their ICBMs in a first strike 
against the United States. The reason they didn't do that is 
because it would have destroyed them, just as much as it would 
have destroyed us.
    So, in that sense, there are high degrees of 
interdependence between the United States and capital exporting 
companies to the United States. This degree of interdependence, 
as I said, will constrain U.S. foreign policy in some ways. 
There are ways in which we do need to please our foreign 
creditors.
    At the same time, there are limits on what foreign 
creditors can do to influence us, precisely because they can't 
see all of their assets wiped away with the blink of an eye. 
They would be equally devastated.
    Chairman Gutierrez. Thank you. Thank you very much. Dr. 
Setser, in your testimony you indicated that many foreign 
governments clearly expected the U.S. Government to protect 
their central banks from taking losses on their holdings of 
Fannie Mae and Freddie Mac bonds. What makes you so sure that 
foreign government investors expected to be protected, and do 
you think we got ourselves in such a bad situation, in terms of 
GSEs and foreign investment, where we are so leveraged to these 
foreign central banks that we had to make certain promises to 
them?
    Mr. Setser. Well, I read the press statements coming from 
China quite closely, and I know some of the names that were 
associated with those statements. And when a former member of 
the monetary policy of the Central People's Bank of China 
indicates that this would be devastating to the global 
financial system, I think that indicates a level of concern.
    And having spoken with some Chinese bankers, and discussed 
with them various options, and seen the deeply concerned 
reaction at any suggestion that some type of restructuring 
might be extended to the bonds, not just a change in the equity 
structure of the companies, I think it was quite clear there 
was a very high level of concern.
    And then, finally, I watch, as I'm sure others do, the 
custodial holdings of the New York Fed quite closely. Foreign 
central banks' total holdings of agencies peaked in late July. 
And after average purchases of, say, $20 billion a month of 
U.S. agency bonds over the course of this year, in the month of 
August their holdings fell by about $12 billion, which I think 
is indicative of more than just expressions of concern, but a 
desire to see much greater clarity before they were willing to 
add to their existing holdings.
    Chairman Gutierrez. Are they going to lose a lot of money 
in China, given the GSE's debacle?
    Mr. Setser. They will not lose money because of GSE's 
debacle, because the U.S. Government, I think, has made it 
clear that the debt of the bonds that the GSEs have issued will 
be honored in full. China will take losses, but those losses 
will come from having very large exposure to the U.S. dollar, 
and having, as a by-product of its currency policy, in some 
sense, overpaid for U.S. dollars on a consistent basis. And 
that will produce very significant losses.
    And I think that's what worries me a little bit about the 
interdependence, is this interdependence where one party is 
going to take financial losses. And, as a byproduct of that, 
they have clearly gained an advantage for their exports, or for 
its encouraged production of U.S. companies as well, in China. 
But it's not clear to me that the Chinese public is on board 
fully with the losses that will likely be incurred.
    And there is a complicated set of issues about how the 
economic meaning of losses at a central bank, that I am sure 
Ted Truman will be more than happy to comment on and explain. 
But I do think that the political reaction inside China is 
important.
    Chairman Gutierrez. I want to go to Dr. Truman. So, 
following up on your colleagues now, right--your former almost 
students, using their words--so, could you just elaborate a 
little bit on the currency issue? How do you feel about the 
Chinese government and their transparency, lack of manipulation 
of their own currency, and the inter-relationship between the 
dollar and what's going on there in our government?
    Mr. Truman. They weren't students; they were colleagues. I 
learned as much from them as they learned from me.
    It is a complicated question. And, in fact, you will find--
I think--the three of us probably agree on some things, and 
then we disagree on some others. But those others are probably 
deeply into the economist weeds, so I apologize for this, 
because I do disagree a little bit.
    You do have this problem, that--to simply answer your 
question--the Chinese buy dollars. The Chinese currency goes 
up. So value of the dollars in Chinese currency, the renminbi 
or the yuan, goes down. Their dollars are worth fewer yuan. And 
if you were a citizen of China, you would turn around and say, 
``Why did we waste our money buying this currency that is going 
down?'' I think that is the political problem.
    Now, of course, the dollar is still worth a dollar, if you 
want to put it that way. So, in terms of the value of 
purchasing power in the United States, it is the same amount 
today as it was worth--approximately, even aside from 
inflation, but presumably interest covers inflation, mostly.
    So there is a sense in which they could have been doing 
better if they had bought something else, or they kept the 
money at home. On the other hand, the currency reserves, the 
dollars they accumulated, because they didn't want their 
currency to appreciate versus our currency were going down in 
yuan. If you want to be crude about it, that's the price they 
paid for resisting the currency appreciation.
    So, I don't feel too sorry for them, though I agree with 
Dan and Brad that in some sense it is a political issue in 
China and in several other countries who have set up sovereign 
wealth funds. They have woken up one morning with lots of 
foreign exchange reserves and said, ``No, how come we have this 
pile, and now we have to justify to our citizens what we are 
doing.''
    So, rather than just parking it in Treasury securities, and 
so forth and so on, the way they did before, they have gone out 
and said, ``Well, we are going to buy equities,'' or, ``We are 
going to to invest in hedge funds or private equity firms, in 
order to generate at least more return than just holding 
Treasuries.'' But it's a response to, in some sense the by-
product, of the foreign exchange policy.
    Chairman Gutierrez. I will try to see if we have time to 
follow up. Dr. Paul, 5 minutes.
    Dr. Paul. I want to direct a question to Dr. Drezner. You 
said in your opening statement that we are looking at more of a 
symptom than a cause, and I wanted to follow up on that, 
because I agree with you on that. Just the fact that these 
funds exist is not a problem, and may be just symbolic of a 
different problem.
    First off, how do other countries react to this problem? 
What do other countries and other governments think about it? 
Are they having this same discussion, or is the only discussion 
a concern with us here? Do you have a feel for that?
    Mr. Drezner. To be technical to that question, I would say 
other countries are freaking out even more than this one.
    Dr. Paul. Other countries are concerned about this?
    Mr. Drezner. Yes.
    Dr. Paul. And what are they worrying about?
    Mr. Drezner. They are worried--in some ways, again, because 
the United States has the CFIUS procedure in place already, and 
because FINSA was passed last year in response to what happened 
in 2006, in some ways the United States was out in front, 
because it already had, in many ways, a regulatory 
infrastructure in place. The European Union does not have 
similar infrastructure. Other countries are only now just 
beginning to get this stuff online.
    And it also should be pointed out that many of the 
countries that house sovereign wealth funds are also even more 
protectionist when it comes to foreign direct investment. So, 
as a result, Germany just recently passed a law, I believe, to 
guard against sovereign wealth fund investment that will 
probably be declared illegal by the European court, because 
it's so restrictive. Australia also passed a law in the 
beginning of this year. You are also seeing moves by other 
countries, as well.
    Again, I think the United States was actually ahead of the 
curve, in terms of already having pre-existing structures. And, 
as a result, it's probably not done as much, as a result.
    Dr. Paul. Would you say, then, they are treating a symptom, 
or are they looking at the basic cause of the problem?
    Mr. Drezner. No, I think they are still treating the 
symptom.
    Dr. Paul. Still--okay. Let's talk about the real cause. Is 
there an imbalance in the distribution of our currencies and 
values because the United States issues the reserve currency of 
the world? Is that related to this problem?
    Mr. Drezner. I would say it's partially related, but I 
would actually probably defer to Dr. Truman on this, who has 
slightly more expertise on the dollars of the reserve currency 
than I would.
    There is no question that, if anything, the dollar, having 
the reserve currency, actually allows the United States to run 
a balanced payments deficit that no other country in the world 
would be allowed to do. So that's certainly true.
    On the other hand, the magnitude of the deficit we are 
talking about now dwarfs the sort of comfort level I think most 
economists would have, in terms of running a deficit just 
because the--our currency is the reserve currency.
    Dr. Paul. Okay. I will, then, ask Dr. Truman. What I am 
thinking about along this line is, if we can issue the reserve 
currency of the world, and there is no substance to it because 
we have license to issue it, we are likely to issue a lot of 
it. And as long as there is a trust, whether it's a worthy 
trust or not, other countries are going to take our dollars, 
which encourages us to print more dollars, and we get to export 
our inflation, so to speak, causing some of these problems.
    Do you agree that there is something to this, that because 
we have a reserve currency we contribute this significantly to 
the imbalance because we get away with something maybe that we 
shouldn't be getting away with?
    Mr. Truman. I agree with you 35 percent, if I may put it 
that way, that because we--as Dan said--issue a reserve 
currency, it means that we can more easily finance our deficit. 
And that leads us to both internal and external deficits and, 
perhaps, to be less concerned about them than we should be.
    On the other hand, as you said in your very statement, in 
some sense it also gives the opportunity to the rest of the 
world to vote with their feet, or vote with their pocketbooks, 
or vote with their balance sheets. So it's another 
manifestation of this sort of mutually assured destruction, if 
you want to use that term.
    So, if we go too far, they can walk away from the dollar. 
There will be some consequences for them financially, but there 
are other things that they can walk away into: commodities, on 
the one hand, if you're really worried about inflation, or into 
other currencies.
    And so, the financial leaders of the United States, if I 
can put it that way, and you guys in Congress too, for that 
matter, every time something happens--and you see it today in 
the newspapers, talking about Fannie and Freddie, ``We are 
going to put this on the budget, and it's going to count as 
part of the debt,'' and that is going to drive up interest 
rates.
    So that, in some sense, is the market, including the 
international market, voting at least a level of concern about 
how we are running our affairs. And they can do that more 
easily for the United States than they can do it for Zimbabwe.
    Dr. Paul. Well, it seems like there will be a limit to how 
long we can maintain this balance. And, eventually, we can't 
come up with bailing out Fannie Mae and Freddie Mac, which 
would have really disturbed this balance, because the dollar 
would have continued down, and it gave a tremendous boost to 
the dollar. But that's hardly seen as curing the problem. It 
is, once again, treating the symptoms.
    But I appreciate your testimony, and I yield back.
    Chairman Gutierrez. Thank you. Congresswoman Gwen Moore 
from Wisconsin, you are recognized for 5 minutes.
    Ms. Moore of Wisconsin. Thank you, Mr. Chairman. This has 
been very helpful testimony this afternoon, and I don't know 
exactly who to direct my questions to.
    But I--one of the things that I am very curious about is 
that since I have joined this committee there has been a 
tremendous urging on the part of Europeans and even Americans 
for China to not manipulate its currency, so to speak. And, 
really, listening to your testimony today, I am curious.
    If they were, in fact, to allow their currency to rise 
based on market forces, wouldn't that be less of an incentive 
to hold on to our American exchange reserves? And you know, 
what if they were to say, ``Okay, everybody--the Europeans, the 
Americans--wants our currency to rise. Let is rise.'' What do 
you think could be those consequences?
    Mr. Setser. I think it depends on whether China lets its 
currency rise to the market clearing rate, or makes a much more 
incremental adjustment. If China makes an incremental 
adjustment, I think the basic dynamics that we see now would 
continue. That is to say China will continue to run a 
meaningful trade surplus, because it will take time for the 
trade surplus to--China's trade surplus--to come down, even 
with something of an appreciation.
    And Chinese residents and foreign investors will believe 
that there is still more adjustment to come, and that will lead 
to ongoing growth in China's reserves. We sort of have seen 
this. This is sort of more or less what happened after China 
allowed its currency to adjust by a small amount in 2005, and 
is also, broadly speaking, the pattern that we have seen in the 
past year when, until the past 3 months, China allowed a 
faster-paced appreciation.
    Here I would also note that it is important to 
differentiate between movements against the dollar, which have 
been present, and movements, in China's case, against a broad 
basket of its currencies. If China is going up against the 
dollar, and the dollar is going down even faster, China's 
currency isn't really going up. And that, more or less, has 
been the case. So I think that's sort of a big gap that has to 
be made up.
    In the unlikely event that China moved all the way to a 
market clearing rate, and private outflows had to balance its 
trade surplus, there would be a very significant adjustment in 
the pattern of capital flows out of China, which might have 
significant market implications. But I think the probability of 
that is fairly low.
    Ms. Moore of Wisconsin. Okay.
    Mr. Truman. But--
    Ms. Moore of Wisconsin. Okay, go on.
    Mr. Truman. I am going to add just one point, which is 
that, meanwhile, China has accumulated $2 trillion. So even if 
they stopped buying dollars tomorrow, or 5 years from tomorrow, 
they still would have to worry about investing those dollars in 
the United States, or somewhere else.
    So, in that sense, the problem is still with us. The legacy 
of the problems of the past would still be with us. That was 
the only thing I would add.
    Ms. Moore of Wisconsin. Okay. Let me ask this. I am really 
relieved to hear from this panel that there is--it's really 
doubtful that there could be any really politically motivated 
funds management of these sovereign wealth funds, that they are 
really looking for the best rate of return.
    What would happen, in your estimation--a couple of things. 
What if, for example, the Chinese people were to decide that 
they--they were to prevail on, say, that the great level of 
poverty in the country is intolerable, and that they needed 
greater liquidity, and they needed to cash in some of these 
foreign exchange reserves? And of course, you know, they have 
this basket of currencies, and perhaps if the U.S. dollar 
continues to plummet, that's a political motivation that's not 
nefarious, but it's something that could really happen.
    If they needed a great influx of liquidity, and decided 
that they needed to cash it in to take care of domestic issues, 
is that a scenario that we can hedge against?
    Mr. Setser. If I can, I don't think it's a scenario we need 
to hedge against, because I think the way that scenario would 
play out is that China would, in some sense, borrow money 
domestically, which it is currently doing. The China Investment 
Corporation is issuing bonds domestically inside China to buy 
foreign assets.
    It could change from issuing bonds domestically to buy 
foreign assets to using that money to make domestic investments 
inside China. I personally think that would probably be a good 
trade. It would be in China's interests to do more of that.
    In a macroeconomic sense, that would mean that China would 
run a larger fiscal deficit, and that would tend to reduce the 
size of China's current account surplus. So, rather than 
thinking--
    Ms. Moore of Wisconsin. That would help us? That would--
    Mr. Setser. There would be more--
    Ms. Moore of Wisconsin. Would that bring us more into--
    Mr. Setser. We are in a--it depends on who the ``us'' is. 
It would help anyone in the--
    Ms. Moore of Wisconsin. ``Us,'' the United States.
    Mr. Setser. Well, it would help exporters, who would--there 
would be more demand inside China, so there would be more sales 
of goods to China. It might mean somewhat smaller Chinese 
purchases of U.S. financial assets, but that would be just sort 
of a rebalancing away from the situation we have had over the 
past several years, where exporters have not sold as much as 
they otherwise would have, and financial players have had 
access to funds at a lower rate than they otherwise would have.
    I think if you want to have the global economy adjust, you 
need to have China invest more in China, and China invest a 
little bit less in U.S. treasuries.
    Mr. Truman. We stop exporting paper to them, and we start 
exporting goods to them.
    Ms. Moore of Wisconsin. Okay.
    Mr. Drezner. Could I just add one thing?
    Ms. Moore of Wisconsin. Yes, with the indulgence of the 
Chair. May he answer?
    Chairman Gutierrez. Yes.
    Ms. Moore of Wisconsin. Thank you.
    Mr. Drezner. Just one other thing, which is this is one of 
the problems with sovereign wealth funds, in terms of 
relationship to U.S. democracy promotion, which is the scenario 
you just outlined is not an inconceivable one.
    Furthermore, if you were to have some kind of 
democratization, let's say, in the Gulf countries as well, this 
could also lead to unpredictable effects. There is a paradox, 
in terms of sovereign wealth funds particularly emerging in 
countries that have relatively low per capita income, because 
the political perception is, ``Why are we holding trillions of 
dollars, or hundreds of billions of dollars in U.S. dollars, 
and not investing it domestically?''
    Furthermore, if you marry that in some cases in countries 
with relatively rampant anti-Americanism, if you have a 
democratic regime, they could actually then decide to act 
politically. And it should be noted that it's actually 
sovereign wealth funds based in democratic countries that are 
most likely to attach political conditions to their investment. 
And I am thinking here of CalPERS in the United States and 
Norway's fund, as well.
    Mr. Meeks. [presiding] Mr. Manzullo?
    Mr. Manzullo. Pass.
    Mr. Meeks. Take a pass? I will recognize myself then, 
before I go to Mr. Watt.
    Let me follow up with Dr. Setser really quick. I know that 
you just said that investment from China, Russia, and Saudi 
Arabia should be the ones that concern us. Can you elaborate on 
that a little bit further?
    Mr. Setser. Sure. Right now, China is adding roughly $700 
billion to its foreign assets. So, you know, that's why I was 
not concerned if China had a bigger fiscal deficit. I think it 
would just mean that they would add $600 billion or $500 
billion or $400 billion to their foreign assets. But that is, 
by far, the biggest source of foreign assets around, and that 
has generally been invested in fairly safe treasuries, some in 
agencies.
    If that were to change, that would have a much bigger 
impact, in my judgement, than the shift of a smaller country. 
And China, obviously, has a somewhat different political 
relationship with the United States than does a country like 
Norway or a country like Singapore.
    The second biggest source of foreign asset growth in the 
global economy right now is probably Saudi Arabia. They are 
certainly going to add over $100 billion to their foreign 
assets. And, again, that has been invested very conservatively, 
as best we can tell. There is extremely little reliable 
information.
    And then, until the events in Georgia led to a significant 
outflow of money from Russia, Russia was the third largest 
source of foreign asset growth in the global economy. Combine 
those pools of money and you're looking at an increase. The 
annual increase in their foreign assets was approaching about 
$1 trillion. The annual influx of new money into the Gulf 
funds, into the Norway fund, was about $150 billion.
    So, when I look at the magnitudes, and look at how those 
flows could change, and who would--what the impact would be, it 
strikes me that the biggest changes potentially would come from 
these sets of countries.
    And then, as Dan alluded to quite accurately, these 
countries are much poorer than the existing countries. And even 
in the existing countries with big funds, I think there is 
pressure. You know, if you look at some of the stuff that Abu 
Dhabi is doing, it's designed to spur their own economic 
development to buy--you know, ``Let's put some money in 
Ferrari, and then Ferrari should put a theme park in Abu Dhabi, 
because we want to compete with Dubai.'' Is that commercial? Is 
that political? Is it prestige? It's all kind of rolled 
together.
    And I think you could possibly see some of those same 
complicated political pressures emerging amongst these other 
countries, and I think that might change the way sovereign 
funds invest.
    Mr. Meeks. Thank you. Let me ask you this question. And I 
think everyone agrees, when we are talking about that, that 
it's the symptom and not the cause of some of the economic 
problems. But here we have had several hearings, as I indicated 
in my opening statement, on the questions of transparency, etc.
    I know in Chile, for example, that recently the 
International Monetary Fund just broke a preliminary agreement 
with the world's largest sovereign wealth funds about a code of 
conduct that covers issues of transparency, governance, and 
accountability of sovereign wealth funds.
    I heard Dr. Truman say we have to be careful in how we 
regulate, because it could boomerang back to us, because as 
quiet as it's kept, a lot of our pension funds, etc., that is 
sovereign wealth dollars that we use overseas.
    The question that I have is should we--you know, in trying 
to settle some of this issue of transparency, should we, the 
United States, be one of the leaders in trying to set this code 
of conduct, and call for--in pursuing a policy of transparency 
and rules that can be enforced by all the countries across the 
board?
    Mr. Truman. Let me answer, with your permission. Actually, 
we have been involved. I think it is useful to you to 
understand; it was not the Fund who did this; it was actually 
the countries with the sovereign wealth funds.
    Because the United States has sovereign wealth funds in 
addition to the State pension funds--as was mentioned, Alaska 
has a fund, and Wyoming has a fund, and so forth and so on. So 
we were in the room with Abu Dhabi and with Singapore. And 
also, Australia was in the room, and also Canada was in the 
room, because they are the same--and Norway was in the room.
    So, this is an agreement that involves all the countries 
who were in the room, the 23 or 26--23, actually, the number 
is; there were 3 observers, so they--23 countries who were in 
the room, and that whatever the agreement is, they all agreed 
to apply it, all the large funds, with the exception of Hong 
Kong and Saudi Arabia--if you think it has a sovereign wealth 
fund, but Saudi Arabia said they don't have one--also was 
participating in this.
    So on the assumption that they all have agreed, which is 
the assumption I am making, and on the assumption that it's a 
strong agreement, in terms of increased accountability and 
transparency, then you actually have had a useful document to 
get people to come together. It's not an imposed regulation. 
It's an agreement about how they are going to try to conduct 
their own business, going forward.
    And that, I think, is actually encouraging, because it is 
an international agreement about how to approach this matter, 
which is, I think--I don't want to offend anybody here in 
Congress--is probably preferable to doing it unilaterally by 
our own action.
    Mr. Meeks. Thank you. Let me ask one other question, then 
I'm going to yield to Mr. Watt and Mr. Manzullo is--or to the 
chairman.
    Different area. Trying to figure out how to, you know, 
maybe you can do some good for poor countries. And Bob Zoellick 
of the World Bank had said not too long ago, and urged some of 
the sovereign wealth funds to invest 1 percent of their assets 
in equity in Africa. And you know, I sit on the Foreign Affairs 
Committee also, and look at the condition of Africa and the 
infrastructure and things.
    I was just wondering. What would your opinion be that we 
would--to set--in Chile, all the countries got together and 
said, ``We are going to put together 1 percent, we are going to 
set aside 1 percent for investment and infrastructure and other 
things in the continent of Africa,'' what would you--what's 
your opinion of something of that nature, as Mr. Zoellick had 
put it?
    Mr. Truman. You have heard from me on this subject, so I 
will let someone else answer.
    Mr. Drezner. I will give a quick answer. I would say, first 
of all, as I said before, there is a political tension in some 
of these countries that host sovereign wealth funds about the 
fact that they are holding trillions of dollars of assets, but 
within their own country are relatively poor.
    So there might be--that tension might still exist. If China 
was suddenly to say, ``We are going to dedicate 1 percent of 
our sovereign wealth fund to helping Africa,'' I could see 
citizens in Chengdu asking, ``Well, what about us?'' So that 
could be one problem.
    The second thing that should be pointed out is that the 
foreign policy effects of this we are already seeing in Africa 
in the form of official Chinese investment, in terms of aid 
flow, which is--on the one hand, this would undoubtedly help, 
in terms of African economic growth. On the other hand, it 
would also cause these countries to be far less willing to make 
policy reforms advocated by the United States and by the bank 
and fund, because they would be less dependent upon the bank 
and fund for development capital.
    Mr. Meeks. Mr. Manzullo? Thank you.
    Mr. Manzullo. Well, thank you. I am sorry I'm late, but in 
this great world of automation, I was trying to make a car 
payment on the Internet, and then on the telephone. And so I 
finally had to call the government office of the car 
manufacturer to say, ``Why don't you have somebody answer the 
telephone?''
    So, I guess maybe my question to each of you would be, 
``When someone calls your office, do you have a live person who 
answers the telephone,'' but I don't want to do that.
    I am just throwing that out. In fact, when I was with 
Secretary Gutierrez several months ago, and people wanted to 
know how to grow business and succeed, he said, ``The first 
thing that you never do is have an 800 number or an automated 
answering machine.''
    I don't know why I brought that up, but the level of 
frustration is high, and it's the same time that somebody cut 
the telephone line in front of our house back home, and my wife 
was on the cell phone waiting for the telephone people to pick 
up her phone.
    The--when CFIUS was amended last year, I offered the 
amendment that called for the elevated level of review, in the 
event that there was a sovereign wealth fund involved. It 
probably came out of the Dubai transaction.
    And when I look at these sovereign wealth funds--I mean, 
for example, in the United States, a State teacher's pension 
union--I'm sorry, a State--yes, a State teacher's union pension 
fund, that would be called a sovereign wealth fund, is that 
correct? Because--
    Mr. Truman. I would, but not everybody would.
    Mr. Drezner. There is some debate on this issue.
    Mr. Manzullo. Well, that's like the telephone company. I 
mean, you know, tell me--because I see in--go ahead.
    Mr. Truman. Well, if it is a foreign government pension 
fund, it would be subject under CFIUS to the same kind of 
government restrictions. I am sure that I don't speak for the 
United States Treasury, but it would fall under the government 
category of CFIUS regulations today.
    Mr. Manzullo. Right.
    Mr. Truman. If it is a foreign government pension fund.
    Mr. Manzullo. Right.
    Mr. Truman. So, if it was Canada, or it was Canada's 
pension fund, it would fall under the government regulations.
    Now, whether it was, strictly speaking, a sovereign wealth 
fund is another matter. The Canadians--as they probably told 
you in that hearing--said, ``No.'' They think they are not. I 
think they are--it quacks like a duck. The Canadian pension 
fund, as far as its being a sovereign wealth fund, in my view, 
because it quacks like a duck, therefore it is a duck, and I 
would consider it that. But the Canadian pension fund does not 
consider itself a sovereign wealth fund.
    Mr. Manzullo. All right. The reason I ask that is that I 
know there was a lot of angst--and, in some cases, rightly so--
but according to the stats that I look at here from Dr. Truman, 
it says that governments in the United States own or control 
more than $3 trillion, or 20 percent of the global government 
total of sovereign wealth funds.
    And so, you have made the statement. I guess I was just 
asking you to--
    Mr. Truman. Okay. Sorry. We have U.S. State and local 
government pension funds that are approximately $3 trillion in 
value.
    Mr. Manzullo. Okay.
    Mr. Truman. And approximately a quarter of those funds are 
invested abroad. That's an estimate, since I haven't counted 
all of them. But that's how much CalPERS, which is one of the 
biggest ones--
    Mr. Manzullo. Okay. Let me stop you right there, then.
    Mr. Truman. Okay.
    Mr. Manzullo. State and local pension funds would be 
considered to other countries SWFs.
    Mr. Truman. Well, think about it this way. Certainly, 
Alaska's fund is. And, in the case of Abu Dhabi and Dubai, 
those are states within the United Arab Emirates.
    Mr. Manzullo. Okay.
    Mr. Truman. So you're dealing with subnational units in the 
case of Abu Dhabi and Dubai.
    Mr. Manzullo. Okay.
    Mr. Truman. And so you only have a question of whether you 
want to think of a pension fund as a sovereign wealth fund. 
And, in terms of political issues, as Dan pointed out when he 
cited the example of CalPERS, many people would argue that 
CalPERS has a political agenda in its investment strategy. I 
don't think it has been political in the past.
    Mr. Manzullo. You mean that California wants to secede from 
the union?
    Mr. Truman. Yes, or the rest of us want to throw them out.
    Mr. Manzullo. Okay.
    Chairman Gutierrez. The time of the gentleman is--
    [Laughter]
    Mr. Manzullo. Chairman, thank you. I know that--I was 
just--the point of my inquiry was to try to define and lower 
the expectations of many that there is something innately wrong 
with SWFs. And you answered the question. Thank you.
    Chairman Gutierrez. Congressman Watt.
    Mr. Watt. Thank you, Mr. Chairman. Let me just say first I 
was privileged to accompany the chair of this subcommittee to 
Abu Dhabi and various places to look and understand more about 
sovereign wealth funds, and came away with less of a concern, 
probably, than--coming back, than I had when I left the United 
States going there, partially because those sovereign wealth 
funds that we looked at were controlled by people who were 
friendly to us, as has been indicated.
    The larger problem, as I saw it, was that you can't set up 
a set of rules in what is theoretically a free world market for 
one set of people who are your friends that is different than 
the set of rules that you set up for those who are not your 
friends.
    And I think either Mr. Setser or Mr. Drezner--I didn't hear 
Mr. Truman's testimony, so I know it wasn't him--but one of you 
talked about this tension between the old funds and the new 
funds. The problem is that you can't have a different set of 
rules. Or can you have a different set of rules for those 
people who are your friends? In the economic free market, can 
you have a set of rules that is different for your friends than 
for your enemies?
    Can you have two sets of rules, first of all? I guess 
that's the--and I would welcome a yes or no answer to that, 
because I--
    Mr. Drezner. I am an academic, sir, so I would have to say, 
``It depends.'' I can't give you just yes or no.
    I mean, my understanding of the CFIUS procedures is that 
the--
    Mr. Watt. Don't talk to me about CFIUS. I am talking about 
rules in general, transparency, because I am going on to CFIUS.
    Do you accept the general proposition that you, in a free 
economic world market, have to have a set of rules that are 
consistent, across the board?
    Mr. Drezner. I would say yes.
    Mr. Watt. Okay. All three of you--
    Mr. Truman. And I would say, you can do it--have the same 
rules--but I--
    Mr. Watt. Yes, you can. But--
    Mr. Truman. You end up--
    Mr. Watt. But the general proposition is that you have to 
have--
    Mr. Truman. It's unwise, yes.
    Mr. Watt. All right. If that is the case, then I guess my 
next question, then, becomes is CFIUS adequate to--actually, it 
could set up a different set of rules, as far as CFIUS is 
concerned, because it's about national interests. And I 
understand that we could set up a different set of rules 
related to national interest, based on who our friends are and 
who our enemies are.
    I haven't been all that enamored, historically, with the 
choices that we have made across the board about who our 
friends and who our enemies are, in terms of dictators, you 
know. They serve our interest, even though they don't promote, 
necessarily, our values. But that's a different question.
    I accept that notion. Okay. The 20 or so countries got 
together and they made up these transparency rules. What 
happens if our enemies say, ``We don't abide by those 
transparency rules?'' They really have no enforceable effect at 
this point. That's where governments step in, I guess. The 
private market can set up some rules, but it can't enforce the 
rules, I take it.
    Are the rules sufficiently enforceable, and equally 
applicable to both our friends and enemies, other than CFIUS, 
that you're satisfied where we are at this point, I guess is 
the bottom line question that I am asking.
    Mr. Truman. Let me try this.
    Mr. Watt. Okay.
    Mr. Truman. The first part of the answer is that we don't 
know yet, because we don't know what the rules are. But let's 
assume that the rules are ones that you and I would agree on 
were sensible rules.
    I am now going to give you a hypothetical answer. That 
group got together and wrote rules. There were various 
countries, including Russia and China, to use those two 
examples, who participated in the process. They now have a lot 
of peer pressure--
    Chairman Gutierrez. Dr. Truman, I ask you to--we have a 
vote on the House Floor.
    Mr. Truman. They will have a lot of peer pressure to obey 
those rules. And there is no assurance of that, but I think 
there will be a lot of pressure on them, as sovereign wealth 
funds, to abide by the common rules that were agreed.
    Chairman Gutierrez. Thank you very much. Congressman Keith 
Ellison, from Minnesota.
    Mr. Ellison. Professor Drezner, in your submitted testimony 
for today's hearing, you mentioned a comment made by former 
Treasury Secretary Larry Summers about the geopolitical 
concerns caused by ``the financial balance of terror.''
    Could you extrapolate on that thought a little bit, and 
share what you had in mind when you made those comments?
    Mr. Drezner. Certainly, Congressman. Traditionally, if you 
study international relations, you tend to observe that there 
is a lot more cooperation out there on economic issues than 
there are on security issues.
    And one of the reasons this has been hypothesized to be the 
case is that if countries defect from the rules of the game on 
trade, or if they defect the rules of the game on finance, the 
implications aren't immediate. Whereas, if a country defects on 
the rules of the game in security, you have a war, and it's 
suddenly a very instantaneous shift in the distribution of 
power.
    One of the things that is happening as a result of the 
deepening financial interdependence we are seeing now is that 
the game in economics is beginning to shift from one where if 
there is a defection there are costs, but the costs play out 
over a long period of time, to the point where if the People's 
Bank of China were to decide not to buy agencies, or sovereign 
wealth funds were to decide not to buy dollars, the effects 
could be potentially much more drastic and much more immediate.
    Now, does this mean, therefore, that will happen? No. Just 
as in the case of where you had countries with large numbers of 
nuclear weapons, mutually assured destruction means you don't 
have an incentive to strike first.
    So, as a result, my tendency is to think that there is a 
financial balance of terror. And, really, the question is how 
comfortable are you with that? Mutually assured destruction led 
to 40 years of peace during the Cold War, but it also led to a 
fair amount of anxiety, as well. And I am just trying to be 
balanced in saying there is some good and there is some bad, as 
a result of this.
    Mr. Ellison. Thank you. This is one for all of the 
panelists. What do you believe is the key to preventing the 
politicization of sovereign wealth funds? Is the solution for 
the recipient country to control which funds are allowed to 
invest in that country, or is it more effective to establish 
transparency guidelines for all sovereign wealth funds to be 
held within their countries of origin?
    Mr. Setser. If I can begin, I mean, I think all sovereign 
funds are created as a result of a political decision of one 
kind or another.
    The decision to take oil export revenues and to channel 
that to a sovereign fund, rather than to use it to finance 
domestic investment is a political decision. The decision to 
intervene in the foreign currency market, to keep your currency 
from going up, is a political decision. The act of accumulating 
foreign assets, if you're a government, is a political 
decision.
    The question then becomes--and you know, we in the United 
States have a limited capacity to directly stop that, and we 
pay a good dollar for imported oil. Once we paid the dollar, 
it's someone else's decision about how they want to use that 
dollar. They can use it to buy more goods, or they can use it 
to buy more financial assets.
    Once, though, they have made a decision to not spend the 
dollar, to invest the dollar, then they have a series of 
choices about how to invest. And many countries have a national 
interest in making money. They save the dollar, and they would 
like to make more money.
    Other countries may have another kind of national interest. 
They may say, ``Well, we, as a country, are under-represented 
in the global ownership of oil or minerals, so we would like to 
invest in ways that would increase the share of global mineral 
supply that is owned by our nationals. And, as a government, we 
have the foreign exchange, we can help channel some of that 
foreign exchange to state companies that are expanding 
abroad.''
    That is a decision, it's a political decision. It may not 
fall under the rubric of an investment by a sovereign wealth 
fund, and I think that's one of the points of agreement amongst 
our testimony, that focusing solely on sovereign wealth funds 
is too narrow. There is a much broader rubric of sort of state 
capitalism, state enterprise, all of which can draw indirectly 
on some of the foreign exchange.
    You can also make an investment that is designed to 
enhance--support your own economic development. Now, that's 
kind of an awkward thing to do because, remember, the beginning 
point is a decision that you didn't want to spend the money at 
home, and you were shipping the money abroad. So there is sort 
of a tension there.
    But you could buy assets which you think will have positive 
spillovers for your own plans for economic development. Maybe 
you will invest in a company and then they will make an 
investment back in you, which kind of undoes some of the 
initial decision to invest abroad.
    Or, you think that you can buy some intellectual property 
which has some value to you, and that is why there is a process 
of review. And I think that is sort of a sensible way of trying 
to balance the reality of money that is under control of 
governments can be invested for a range of purposes, probably 
primarily to make money, but not necessarily exclusively. And 
you have to evaluate it on a case-by-case basis.
    Mr. Truman. I think that was a good answer. A clear answer 
to a complicated question.
    Mr. Ellison. Yes, right. Are we done?
    Chairman Gutierrez. Thank you. Yes, the time of the 
gentleman has expired. We have about 7 minutes before we have a 
vote on the House Floor.
    First, I want to thank you all. I wish we didn't have to go 
vote, so we could, I am sure, have members continue to engage 
in this conversation, this dialogue that we are having. We are 
going to have more hearings on sovereign wealth funds. I think 
it's important that this panel understand it, and that the 
Financial Services Committee take issue with it.
    But it seems to me that what I come away with, more and 
more--whatever panel--is that: China undervalues their 
currency, which leads me to believe that the only way you can 
do that is to manipulate your currency; that they are a growing 
economic force; they are changing the world, not just because 
of the Beijing Olympics and how many gold medals they won, 
though that's an indication of what they are investing in; and 
their prestige, internationally.
    It's not something I am particularly afraid of, I just want 
to make sure we are strong, and that we have--and that there is 
some balance and fairness, and that we are not--you know, they 
are not getting some--and I think that when you bring--we look 
at--and I am going to continue to look, and I thank you for all 
stressing sovereign wealth funds is a symptom.
    But when you have Russia controlling all of the gas, 
attempting to control all of these new gas pipelines, and all 
of these new--how would I say it--energy pools, when you see 
the way they are acting in Georgia, when we know we have not 
transparent governments with not transparent billions of 
dollars, I think I am not quite as unworried as all of you are, 
or appear to be, as you testified today before this committee.
    Things have a way of changing. I have seen China. We have 
seen how China acts in Africa when it wants raw materials, and 
the kind of governments that it will support, in spite of our 
best efforts. That is a scary situation, what they are going to 
be doing with their sovereign--and I understand it.
    I really--and, Dr. Truman, I thank you for putting these 
sovereign wealth funds in the categories, because I like the 
fact that you actually give them points. And, I mean, for 
transparency, and the way--and I think that is a huge 
difference in something that my colleague Mr. Watt, and 
others--you know, what is the--they are not all the same. They 
are not all the same.
    And I just want to end with this. I went to Abu Dhabi. I 
went to Dubai. I came back, much like Mr. Watt, less worried 
about them. I mean, they surround themselves with these--they 
are either Brits or Australians or Americans. It's hard to tell 
that they were actually a sovereign wealth fund.
    But what's curious is when you ask them who controls the 
money, they try to act as though they were equity traded on 
the, you know, S&P 500 or the U.S. Stock Exchange. They won't 
give you the name of the sheik, they won't give you the name of 
the crown prince who actually controls the money. And in that, 
there is a distinct difference. And with Russia, there are 
other kinds of differences.
    So, I thank you all for coming. I want to thank the 
witnesses and the members for their participation.
    The Chair notes that some members may have additional 
questions for the witnesses which they may wish to submit in 
writing. Therefore, without objection, the hearing record will 
remain open for 30 days for members to submit written questions 
to the witnesses and to place those responses in the record, 
and also to submit written statements for the record.
    This subcommittee hearing is now adjourned. Thank you.
    [Whereupon, at 3:35 p.m., the hearing was adjourned.]














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                           September 10, 2008

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