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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 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

DON CAZAYOUX, Louisiana 

TRAVIS CHILDERS, Mississippi 

SPENCER BACHUS, Alabama 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

DEAN HELLER, Nevada 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON DOMESTIC AND INTERNATIONAL MONETARY POLICY, TRADE, AND

TECHNOLOGY

LUIS V. GUTIERREZ, Illinois, Chairman 

CAROLYN B. MALONEY, New York 

MAXINE WATERS, California 

PAUL E. KANJORSKI, Pennsylvania 

GWEN MOORE, Wisconsin 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

WM. LACY CLAY, Missouri 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

KEITH ELLISON, Minnesota 

TRAVIS CHILDERS, Mississippi 

RON PAUL, Texas 

MICHAEL N. CASTLE, Delaware 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JEB HENSARLING, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

DEAN HELLER, Nevada 

(V) 

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 

(1) 

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. 

2 

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. 

3 

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. 

4 

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 

5 

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 writedowns 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 

6 

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 commitVerDate Aug 31 2005 15:12 Dec 05, 2008 Jkt 045621 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\45621.TXT TERRIE
7 

ment 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 

8 

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, 

9 

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 

10 

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 

11 

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 

12 

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 transVerDate Aug 31 2005 15:12 Dec 05, 2008 Jkt 045621 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\45621.TXT TERRIE
13 

parency 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 socalled 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. 

14 

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 

15 

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 reVerDate Aug 31 2005 15:12 Dec 05, 2008 Jkt 045621 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\45621.TXT TERRIE
16 

sponse 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. 

17 

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 

18 

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 

19 

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 

20 

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 

21 

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. 

22 

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 

23 

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 govern- ment 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. 

24 

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. 

25 

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 

26 

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 

27 

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 

28 

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.] 

(29) 

A P P E N D I X 

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