The Singapore Government has indicated that it is willing to adopt a controversial new code of practice that would regulate the investment decisions of sovereign wealth funds (SWFs) if Western countries commit to not blocking future acquisitions.

Singapore's two sovereign wealth funds are among the largest in the world with combined assets of more than $500 billion (£247 billion) and the country is concerned that protectionist sentiment in Europe and the United States could prevent it investing its vast reserves.

But the Singaporeans are also aware that Western countries are uncertain about the way sovereign wealth funds mix commercial and diplomatic motivations. A widespread fear among Western governments is that foreign countries may use their funds to control or influence strategic industries in ways that could be detrimental to national interests.

The International Monetary Fund (IMF), European Union and US Treasury are negotiating with a number of funds to develop a code of practice that would provide more clarity in the funds' investment criteria.

Singapore and Abu Dhabi, holder of the world's largest sovereign fund at $900 billion, are leading talks with Western governments, and their attitude towards the introduction of a code of practice will be important in determining whether other countries implement the proposed new rules.

The Abu Dhabi Investment Authority wrote to Henry Paulson, the US Treasury Secretary, last week in a move interpreted as an opening attempt to remove some of the political fear that surrounds the SWFs.

Laurence Lien, director of investment for the Ministry of Finance, which owns Singapore's funds, told The Times: “We agree that adequate disclosure would be beneficial and appropriate and we support the IMF's development of a code of practice. We are actively contributing to this discussion but we also want to make sure this is a voluntary arrangement.” Mr Lien also expressed concern about Western protectionism, and it is likely that the sovereign funds will seek a commitment to openness in return for introducing a code of practice.

He said: “We recognise the concern that sovereign wealth funds may be used for political ends, but we hope that this is not part of a protectionist agenda to close markets. To put in protective barriers would be damaging to the world economy.”

Singapore's GIC fund actively manages the nation's reserves and has assets estimated at more than $330 billion. The fund bought a 9percent stake in UBS, the Swiss bank, for $14.5 billion in December.

Temasek, Singapore's other SWF, directly holds shares in companies, including Singapore Airlines and a 10 per cent stake in Merrill Lynch. Temasek's investments have traditionally been in Singaporean businesses - historically about 70 per cent of its portfolio - but the fund has decided to shift its focus. In the future, about one third of its assets will be in Singapore, one third in Asia and a third in other developed markets. Mr Lien insisted that the Singapore Government did not influence the investment decisions of its SWFs and the first he heard of GIC's investment in UBS was from media reports.

He said: “They decide their investment themes and where they can create value, and we do not influence that at all.” Mr Lien said the SWFs act as a contingency fund for the nationand contribute to the Government's budget. The Government can allocate up to 50 per cent of the net annual income generated by the funds to the Ministry of Finance's spending.

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