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Wed 19 Dec 2007 11:31 AM

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Oil nation funds prompt Western jitters

Switzerland's National Bank head calls for 'clear rules' to manage sovereign funds.

Government funds managing foreign exchange reserves and investing in foreign companies need clear rules to avoid protectionist responses, Switzerland's National Bank Vice Chairman Philipp Hildebrand said on Tuesday.

Rapidly growing sovereign wealth funds (SWFs), which currently control more than $2 trillion in assets, have triggered concerns in developed countries that foreign governments could gain control over key industries.

Hildebrand's comments come after both the US and the EU have expressed their concern over the rising power of sovereign wealth funds. Merrill Lynch predicts the value of assets controlled by the funds will quadruple to $8 trillion by 2011, and that they could soon exceed the entire hedge fund industry in terms of market influence.

The biggest funds include oil exporters like Norway and Kuwait. The Abu Dhabi Investment Authority (ADIA), which recently agreed to buy a $7.5 billion stake in Citigroup, is considered the world's largest wealth fund with assets estimated as high as $875 billion.

Singapore, Russia and China also each have sovereign wealth funds totaling more than $100 billion in assets.

"The challenge is to preclude an outcome where the activities of SWFs trigger policy responses in mature markets that ultimately lead us down the path of financial protectionism," he said in text of a speech.

"A set of guidelines addressing the threat of politically-driven investment decisions and resurging state involvement in the global economy represents the best currently available option to respond to the challenge of SWFs," he said.

Sovereign wealth funds could play a constructive role in mature markets as they provided a source of capital flows from the periphery to the core of the global economy, Hildebrand said.

The United States has recently proposed developing a "best practice" code for this type of funds.

Hildebrand said such guidelines were timely and sensible and needed to cover two central issues. "First, ... a code of conduct must contain governance prescriptions that ensure that the investment decisions of SWFs are not driven by political objectives," he said.

The institutional design of many central banks, based on a clear mandate and independence, could provide ideas for setting up appropriate rules for sovereign wealth funds.

"Second, to preclude a resurgence of state ownership in our economies, SWF guidelines need to spell out upper limits to investment stakes in foreign private companies," he said.

Hildebrand said the Government of Singapore Investment Corporation's (GIC) 11 billion Swiss franc ($9.52 billion) investment in Swiss bank UBS was welcome, repeating comments made last week at the SNB news conference.

"Based on what is known about the GIC, and judging by the reasoning I have outlined in my lecture this evening, there is little cause for concern about the UBS equity stake the GIC will likely acquire," he said.

The European Commission also called earlier this month for ground rules on sovereign wealth funds. It was debating how the European Union - of which Switzerland is not a member - should deal with state-backed funds from countries such as China, Russia and Middle Eastern states that are buying some of the EU's corporate jewels, triggering some political unease.

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