China's possible bid for Potash Corp. of Saskatchewan illustrates the priority some surplus-rich countries still put on pursuing strategic national goals with their windfall cash and risks a regulatory backlash against sovereign wealth funds.
Sources say China's state-owned Sinochem could bid for the Canadian resource company, possibly partnering with its wealth fund CIC or Singapore's Temasek, in a deal worth almost $40-billion (U.S.).
A Chinese bid via CIC could become the latest example of emerging and frontier market nations deploying their sovereign wealth as an economic policy tool to secure energy and food needs or buy industries they want to develop at home.
China's designs on Potash may rile recipient countries that have long suspected SWFs - now major players in global markets with $3-trillion of assets - invest with national political imperatives to the fore.
The risk is it leads to a round of regulation that could impede the flow of capital from the powerful SWF community that has benefited cash-strapped advanced economies since the global financial crisis struck, and helped emerging economies recycle their windfall surpluses.
"As soon as the business environment improves and liquidity eases, noises against foreign capital are going to start becoming wider. Eventually tougher regulation could be coming," said Pervez Akhtar, a Dubai-based partner in law firm Allen & Overy specializing in corporate finance.
"SWFs are strategic investment funds designed for wider policy considerations of the state. It's a very fine line between making commercial investment and commercial-plus, that is furthering of a strategic policy. More states will do investments on the basis of commercial-plus."
Analysts say China's Potash bid, if it goes through, would serve as a litmus test for other sovereign wealth funds that have sharply reduced headline activities after the crisis.
"SWFs have been hesitant to go out in a big way. (Potash) is a big test for markets. That could then give me the touch and feel of the sentiment that may be prevailing in another sector in Canada," said Sven Behrendt, a SWF expert and managing director of political risk consultancy Geoeconomica.
Sovereign funds, which have had had a rocky relationship with the West, have spent the past couple of years striving to convince that they invest for financial reasons.
It was less than three years ago that French President Nicholas Sarkozy hit out at SWFs, saying: "We've decided not to let ourselves be sold down the river by speculative funds, by unscrupulous attitudes which do not meet the transparency criteria one is entitled to expect in a civilized world."
Such concerns receded as the financial crisis highlighted the importance of long-term capital that sovereign funds can provide to developed economies desperate for liquidity.
SWFs themselves also took steps to enhance transparency, creating the Santiago Principles of best practice guidelines in 2008 to fend off the West's criticism.
However, progress in implementing these self-imposed rules advocating transparency and accountability has been slow and patchy.
And now that the West is awash with liquidity and risk appetite is improving, its stance may be hardening again.
Canada's industry minister, Tony Clement, warned earlier this month that its takeover rules would ensure state-owned enterprises would invest with market-based motives, rather than "acting as an agent for a foreign government's interests".
In Italy, shareholders and politicians upset over a sizeable stake held by Libya's wealth fund and central bank in UniCredit forced its chief executive out earlier this month.
In 2008, that very investment by Libya was welcomed as vote of confidence in the bank. It invested again in 2009.
In Australia, a Qatar Investment Authority-owned firm's investment in farmland prompted a Senate inquiry calling for an audit of foreign ownership of land and water.
"At the present time there is no differentiation between private investment and sovereign investment," New South Wales Liberal Senator Bill Heffernan, who chairs the Senate committee on agricultural and related industries, told a local media.
"We need to put all of this on a register, we need to lower the trigger point for reporting foreign asset sales, and we need as part of our sovereignty to consider (our own) strategic investment in Australia."
Sovereign funds are growing aware of a threat of more regulation, a topic of discussion in a closed-door industry forum last week in London attended by various funds officials.
"There's enough regulation. SWFs are already subject to lots of regulation - capital, sector, anti-monopoly, then some rules on foreign investment. Why regulate further?" said a head of an emerging market SWF during a recent trip to London.
"Our DNA says we are a sovereign fund, we cannot be purely financial. And there's nothing to apologize for that. When I make an investment, I have to think about jobs and ethics and being a good corporate citizen, otherwise we get beaten up."