Although having arrived in time to rescue several sinking giant firms rocked by a mortgage crisis, the investments coming from China, Asia and the Middle East remain a source of suspicion and worry for the West, the US in particular, and they are now being subjected to a tight scrutiny.

On January 15, the governments of Singapore, Kuwait and South Korea provided much of a $21 billion lifeline to Citigroup and Merrill Lynch, two banks that have lost fortunes in America’s credit crisis. It was not the first time that either of the two had tapped the surplus savings of developing countries, known as sovereign wealth funds, which have proliferated in recent years owing to rising oil prices and surging exports. The sovereign funds have existed at least since the 1950s, but their total size worldwide has increased dramatically during the last 10–15 years. In 1990, sovereign funds probably held, at most, $500 billion. The current total is an estimated $2–3 trillion and could reach $10 trillion by 2012. Currently, more than 20 countries have these funds, and half a dozen more have expressed an interest in establishing one.

Since the sub-prime-mortgage fiasco erupted last year, these funds have put in almost $69 billion on recapitalising the rich world’s biggest investment banks. With as much as $2.9 trillion to invest, the funds are poised to buy stakes in technology companies and even aerospace. But it is in banking where they have played the role of a saviour.

But still, according to The Economist, a major problem is the backlash they will surely provoke from West’s protectionists and nationalists although so far there is no evidence of any “mischievous” behaviour, as the German government calls it, on their part. So, the relatively friendly welcome sovereign funds have found in America may be temporary. Once an emergency has passed, foreign money is often be less welcome.

In politics, appeals to fear usually sell better than those to reason. But the hypocrisy of erecting barriers to foreign investment while demanding open access to developing markets is self-evident. The kind of fear being exhibited shows as if the sovereign wealth funds are entering the West the way East India Company did in India. Being bailed out from a severe crisis by the countries the West colonised and rules for centuries is too difficult to swallow for most of their people.

Currently, the focus of scrutiny is China Investment Corporation (CIC), which, Congressmen fear, could snap up strategic assets in the credit-tight United States and threaten American security and sovereignty. The CIC has bought a three-billion-dollar stake in US private equity firm Blackstone Group and plans to invest five billion dollars in Morgan Stanley.

To allay its concerns, the US government has sought help of International Monetary Fund which is now drafting an international code of conduct for sovereign wealth funds. But the latter are now resisting the pressure. They are unwilling to accept even a voluntary set of “best practices” that disavows politics, arguing that it is unnecessary because their investments are already strictly commercial in nature.

David McCormick, under-secretary of the US treasury, says that the funds’ track record had so far been good and that there was “no evidence of them making investments for anything but economic reasons.” Nevertheless, he says, there is a fear among many experts that without a code, the funds’ financial clout could lead them to exercise political leverage. But the code can give birth to serious tensions between the two sides. It is quite hypocritical on the part of the West to demand regulations for sovereign funds’ investment at a time when their own governments failed to regulate European and American banks and hedge funds and gave birth to a global economic crisis which they (funds) are trying to defuse.

It is quite ironical that the Bush administration has, for years, showed little concerns about the trillions of dollars that the United States owes to China, Japan, Saudi Arabia and other oil-producing countries, arguing that these debts give no undue leverage to foreign governments. But at a time of global financial instability, it is showing unease when the same governments, having converted their dollar holdings into investment funds, began acquiring companies, real estate, banks and other assets in the United States and elsewhere. The fear is that these funds could destabilise markets or provoke a political backlash.

According to New York Times, one of the American concerns is ideological.. The United States has for years preached the gospel of privatisation, calling on other countries to sell their government-owned industries. Now, with sovereign wealth funds, many experts are asking whether cross-border investment is turning into cross-border nationalisation, raising the prospect of government interference in free markets, only this time, in other countries’ markets.

There was not much political noise in Britain over efforts last year by China and Singapore to buy stakes in Barclays Bank and by Qatar to take over Sainsbury’s. Neither Dubai’s bid for Barney’s, the American retailer, nor China’s purchase of nearly a 10 per cent stake in Blackstone produced an outcry. But in Germany, there is much concern overt Russia’s buying of pipelines and energy infrastructure and Chancellor Merkel has described such investments pose as a big risk to her country.

However, there was extraordinary furore, some time back, when a company controlled by Dubai government tried to take over the management of several ports in the United States and also when a Chinese-government-owned oil company sought to buy Unocal. In both cases, the concern of American politicians was that national security assets were at stake. But in the 1980s, it seems national security was not at risk when Americans recoiled over Japanese companies’ purchases of high-profile properties like movie studios and Rockefeller Centre.

In case of developing countries, the sovereign funds are concentrating on a few sectors of the economy and are not spreading their wealth widely. In Pakistan they have shown interest in banking and telecommunications, particularly after the regime began privatising state units. As a result, much of these two sectors is now controlled by the sovereign funds in the Middle East and East Asia.

According to Shahid Javed Burki, a noted Pakistani economist, four areas of policy need to be kept under constant watch by the policy makers in Islamabad. One, the concentration of foreign investors in a few sectors poses security risks that cannot be minimised even if the sources of funds are from the countries that are, at this time, friendly with Pakistan.

Second, by investing in banking and telecommunication assets Pakistan has to deal with contingent liabilities. The returns to the investors from these investments are in rupees which will need to be converted into foreign currency for repatriation. This will create a problem especially when there is already a yawning trade deficit that has to be financed.

Third, the arrival of foreign ownership in two of the most important sectors in the service economy will retard the development of domestic entrepreneurship in these areas.

Fourth, foreigners cannot be expected to advance the social objectives of the countries in which they are operating. Pakistan needs to deal with the issues pertaining to poverty alleviation and poor income distribution. How will these be pursued when important parts of the economy are in foreign hands?