Sovereign risk overtakes sovereign wealth?

China’s breakneck growth figures, which ought usually to have given comfort to a fearful global economy, rather appear to have increased tension and volatility, as markets grow ever more nervous of potential tightening in China and what its impact could be on the still-fragile recovery – though in the West, recovery still means little more than resetting the economic doomsday clock a few more minutes away from midnight.

Few observers and commentators seem ready to accept Obama’s scratch agenda for reforming US banks at face value. Given the pending healthcare debacle, it is unlikely to be implemented anyway; and has all the hallmarks of a last populist thrash by an administration about to be forced firmly back into the center. But what is significant about both this and the concurrent news from China is that economics is now once again fully a matter of politics.

The much-touted, much-reviled Anglo-Saxon consensus that supposedly emerged in the early-to-mid 2000s supposedly entailed the withering away of the state and light-touch regulation, with globalized natural economic forces left to play and grow under the market’s guiding hand. That myth is now well and truly exploded, with some of the commanding heights of Western finance effectively nationalized as the price of their rescue.

Most accept – and few object – that China’s resilient performance through the crisis was politically engineered, with political as much as economic and social goals: a.k.a. preserving the Communist Party’s position by sustaining growth, high employment, and social stability. The government told banks to lend, and they duly lent. Regardless of the economic risks that this policy entails – which are arguable and in any case longer-dated – the sovereign political risks should give cause for concern. Because, as explained further in this issue (see page 8), politics matters, more than in decades.

Sovereign policy risk should now be a major worry factor for investors everywhere, east or west. President Obama’s latest policy flip has put some of the most significant private equity investors worldwide on notice – in the space of a few sentences. China’s stimulus-driven performance remains vulnerable to policy errors, with Asia Pacific as a whole also facing the all-too-real risk that leaders will duck the challenge and tighten too little too late, leading to more economic pain in future. Meanwhile, Europe’s draft legislation on private funds and Australia’s sudden pursuit of private equity profits, both fostered through political as much as regulatory agendas, continue to overshadow the fortunes of the industry in these highly developed markets. And Dubai stands as a single looming example of sovereign risk as prominent as the Burj Dubai.

If there is a lesson for private equity, beyond just adjusting its risk measures, it is that the industry needs to continue to develop its lobbying and political skills. Historically, this is an area where the closed, clubbable world of private equity funds and their advisors has been particularly inept. Even the wider world of investment banking has clearly been losing the public relations battle with politicians and public alike, leaving them easy targets for populist flareups like Obama’s attack. Any leading private equity professionals due to arrive in Davos later this week should buff up on their PR skills and make sure they have some very articulate, persuasive stories to tell.

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• Topics
• Regulation
• Greater China