A major shift is taking place in financial markets as new economic powers rise to replace the U.S. The world watches and worries as U.S. Treasury Secretary Hank Paulson and U.S. Federal Reserve Chairman Ben Bernanke scramble to stave off the effect of the subprime mortgage crisis. Working with U.S. President George W. Bush, they quickly devised a bailout plan for Bear Stearns last month. They are now attempting to restructure financial markets while preaching transparency. But, when SWFs from Abu Dhabi and Singapore poured billions into Citigroup, Merrill Lynch, UBS and Morgan Stanley, few asked about transparency. They just said, thank you.

In March, Ras al Khaimah Minerals and Metals Investments (RMMI) said it will invest $250 million in the Congo. The government of Ras al Khaimah (RAK) launched RMMI during late January. RAK is one of the emirates in the United Arab Emirates (UAE). According to the Arab SWF, the real estate boom in the Middle East and India will require building materials which will in turn create demand for industrial minerals and metals. RMMI’s two basic objectives: to cater to the growing demand for resources and to identify opportunities in emerging markets.

SWFs are estimated to hold as much as $3 trillion in assets. To add perspective, hedge funds today control about $1.5-$2 trillion in assets. Many of the SWFs were built on wealth accrued from exporting goods and services or exploiting natural resources, namely oil and natural gas. SWFs do not necessarily have to disclose their operations or adhere to the same market principles as other publicly-held multinationals. Some have no fear of doing business with “frontier” markets or corrupt governments.

Developing countries are looking for investments and China needs raw materials. Where should China Investment Corp. (China’s SWF) invest part of its $1.5 trillion? Executives from China Minmetals Corp. and other Chinese-owned mining companies are telling state investment companies to establish a national metal mining fund to provide overseas mineral resources for exploration and development. Of course, this strategy runs counter-current to the business plans of most mining companies exporting ore to China. As the debate brews, Australia will be the first country to vet SWF investments. The Australian Foreign Investment Review Board has established a set of guidelines to assess the extent to which a SWF is “independent from relevant foreign government.” The Australian government announced this plan two weeks after the Aluminum Company of China (Chalco) purchased a stake in Rio Tinto.

As old financial structures break down, new sources of economic power will emerge. SWFs need to invest to secure the best returns for their stakeholders and over-regulation could be viewed as isolationistic. Should they be allowed to compete against publicly- held companies? If a mining company has to devote considerable time and effort to comply with rules of disclosure—the same rules that may prevent them from doing business in frontier markets, then SWFs need to demonstrate the same level of transparency. Likewise, they should be guided by best practices to prevent them from risking their country’s wealth.

Steve Fiscor, Editor-in-Chief, E&MJ