Higher and Mightier

Still, matching Singapore's performance won't be easy. "The bottom line," says Donghyun Park, a senior economist at the Asian Development Bank, "is the would-be Temaseks and GICs are still very much in the learning stages." At the KIC in Seoul, caution is the watchword. It has invested just $8 billion of the $20 billion pledged, all of that into fixed-income investments in the United States, Euroland and Japan, as required by the government.

Most sovereign funds have objectives beyond profit maximization. For years oil exporters the United Arab Emirates, Saudi Arabia, Norway, Kuwait and the State of Alaska have used them to weather periods of low energy prices, for example. The KIC aims in part to promote Seoul as a regional financial hub by luring in outside fund managers, investment banks and financial talent, while training Koreans with similar skills. Korean officials have also indicated that in the future, KIC might be allowed to tap the nation's $200 billion state pension fund, which in "exceptional situations" plans to assist major domestic companies fend off hostile takeovers. The rub: if KIC is linked to protectionism at home, it is likely to encounter retaliation when it shops for assets abroad.

If recent history is any indication, China's new fund is in for intense scrutiny. Analysts expect China will shop for energy, industrial resources and emerging-market stocks to shares in American blue chips like Microsoft and GE. Already, a backlash is brewing. When U.S. private-equity fund Blackstone announced last month that China had purchased a $3 billion stake ahead of the fund's planned IPO, Washington pundits and politicians quickly denounced the linkup. Virginia Sen. Jim Webb called on the U.S. Treasury Department to review a deal that grants China "opportunity for undue influence," as he put it.

Other sovereign-wealth-fund managers are watching the China-Blackstone deal as a test of whether risk-averse state money and high-flying hedge funds can partner successfully. Already the bloom is off. Blackstone has faltered since its IPO in June. Its share price has dropped below what China paid, and on paper the deal has cost Beijing a loss of $3 million. That's one toe that got a little burned.

With Sonia Kolesnikov-Jessop in Singapore

© 2007