July 30 (Bloomberg) -- The U.S., France and Germany are racing to draw up rules to govern developing nations' secretive state-controlled investment funds, spurred in part by Barclays Plc's use of Chinese and Singaporean money in its takeover bid for ABN Amro Holding NV.

With no international body such as the World Trade Organization to oversee such investment, officials in the U.S. are pushing the International Monetary Fund and World Bank to set guidelines. Germany and France, meanwhile, are urging a joint European response.

So-called sovereign wealth funds, which invest currency reserves in foreign assets, control an estimated $2.5 trillion, more than all the world's hedge funds combined. Those favoring rules or guidelines on their conduct say they might avoid a spiral of tit-for-tat curbs on investment that could hurt the world economy.

``All it takes is one fund to do something nutty and the risk of a backlash of protectionism will increase,'' says Edwin Truman, a former U.S. Treasury economist who is now a senior fellow at the Peterson Institute for International Economics in Washington.

China, for its part, says western governments have nothing to fear from its participation as an investor in their economies. ``The U.S. and other developed nations are over-reacting,'' says Fang Ning, deputy director of the Beijing-based Institute of Sociology and Politics, which advises China's State Council.

Don't Worry

If anything, Fang says, ``it's China that should strengthen its national-security guidelines when it comes to foreign direct investment,'' not the other way around. ``The western nations shouldn't be so worried.''

Developed nations also need to be careful they don't kill off a source of capital that may provide just the juice their markets need as stocks worldwide tumble on concern about higher borrowing costs. ``We would do ourselves very serious damage if we put up barriers to these funds,'' says Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts.

While state-controlled investment funds have been around for more than a decade in countries such as Kuwait and Norway, they have proliferated and expanded in recent years as emerging economies amass record foreign currency reserves earned on exports of commodities or consumer goods. Morgan Stanley projects such funds will have $12 trillion in holdings by 2015.

Seeking Higher Returns

Countries such as China and Russia, previously content to keep their reserves in low-risk, low-yielding securities such as U.S. Treasuries, are now seeking higher returns.

China, which said in March it would shift an estimated $200 billion of its $1.2 trillion currency reserves into riskier assets, followed that up by taking a $3 billion stake in New York private-equity firm Blackstone Group LP. Blackstone advised China Development Bank on last week's deal to invest as much as $13.5 billion in Barclays.

Russia, which last year took a stake in European Aeronautic Defence & Space Co., owner of Airbus, plans to carve out part of its $117 billion stabilization fund to finance a ``National Wellbeing Fund.'' Dubai's government last week agreed to buy a controlling interest in New Zealand's Auckland International Airport Ltd.

Size and Secrecy

What unnerves governments whose companies may be targeted isn't only the sheer size of the funds, but also the lack of information on their plans or limits on their reach.

``This is a new phenomenon that we must tackle with some urgency,'' German Chancellor Angela Merkel said at a July 18 press conference in Berlin.

Some, such as U.S. Senator Jim Webb, a Democrat from Virginia, cite national-security concerns; others say such investments raise the risks of financial-market disruption.

France and Germany want to avoid a patchwork of regulations and are pushing for the 27-member European Union to introduce a united approach. ``There is a need to have regulation at the European level which is more structured and stronger,'' Jean- Pierre Jouyet, France's European affairs minister, said in an interview.

Otherwise, companies in countries that don't participate ``will get picked off one at a time,'' says Willem Buiter, a professor at the London School of Economics.

One proposal pitched by EU trade chief Peter Mandelson is for the region to take a so-called golden-share option in strategic industries to keep control of them out of foreign hands.

The Norwegian Model

Advocates for international investment guidelines cite Norway's global pension fund, which has $324 billion of oil wealth invested across a range of assets, as a possible model. ``They've been involved in this for quite a while,'' says Kathleen Stephansen, chief economist at Credit Suisse in New York. The Norwegian government publishes the fund's holdings each year and follows a strategy that limits its acquisitions to small stakes in individual companies.

Clay Lowery, the U.S. Treasury's top international official, praised Norway's example in a speech last month in which he proposed that the IMF and World Bank draw up best-practice guidelines for other funds to follow.

An important element of any guidelines would be disclosure policies, so investors don't have to guess what the funds are up to, he said. Funds should disclose checks and balances to guard against corruption, and managers should describe their objectives, Lowery said.

The U.S. call is likely to draw questions at the August 2-3 Asia-Pacific Economic Cooperation finance-ministers' meeting in Coolum, Australia, Deputy Treasury Secretary Robert Kimmitt said July 27.

Shedding Light

Any rules should shed light on how sovereign wealth funds will be managed, what goals they will have and how they will inform other governments of their plans, the Peterson Institute's Truman recommends. Buiter proposes that state-controlled funds that don't subscribe to international guidelines should be barred from buying assets outside their borders.

Even in developed countries, some warn that the drive to develop rules or guidelines could do more harm than good. Italy's European Affairs Minister Emma Bonino said last week that giving EU members the ability to derail foreign takeover bids was ``not useful and also very difficult to implement.''

In the U.K., where Russia's state-owned gas company OAO Gazprom is buying up domestic gas suppliers, Chancellor of the Exchequer Alistair Darling rejects calls for protecting British companies from takeovers by state-sponsored funds. ``Free trade should be just that,'' he said in a speech last week.

Pressures for Protectionism

John Gieve, the Bank of England's deputy governor, last week warned that ``the switch of reserve-rich countries from lenders to owners of financial or real assets is likely to lead to political tensions and pressures for protectionism.''

Kimmitt says the key to avoiding that may be whether countries looking to buy assets also show they're also willing to allow more investment in their own economies.

``We're going to work hard to keep investment barriers low,'' says Kimmitt, who recently visited Beijing and Moscow to stress that point. ``We hope that the same will be the case in Russia and other trading partners of the United States.''

To contact the reporters on this story: Ben Sills in Madrid at bsills@bloomberg.net. Simon Kennedy in Paris skennedy4@bloomberg.net.

Last Updated: July 29, 2007 16:53 EDT