The People’s Investment Company - the early reports
Market News International reports that China is set to create a new investment company – called the State Foreign Exchange Investment Company. It will supposedly by run by someone from the Finance Ministry, report directly to the state council and have a mandate to buy just about anything. MNI, citing Southern Weekend (a weekly published by the Guangdong communist party):
The new vehicle is likely to be named the State Foreign Exchange Investment Corp and will be headed by Lou Jiwei, currently a Vice-Minister of Finance, the newspaper said. It will be placed under the direct control of the State Council, China's cabinet-level decision-making body.
The new company will take $210 bln in reserves to invest in stocks and bonds, to invest in or take over large multinational companies in key sectors, including big financial institutions, as well as to buy energy resources, the newspaper said.
If Goldman can own a part of a Chinese bank, why cann't China also own a bit of Goldman?
Alas, the State Foreign Exchange Investment Company (SFEIC?) doesn’t really have much of a ring, name-wise. It sounds almost like the State Administration of Foreign exchange. SAFE won't go away, it just won't quite have as much money. And it presumably would continue to invest in relatively safe assets.
Central Huijin will supposedly get a bit of money too. $100b to the report. It already has $60b. But it will basically just manage those PBoC reserves that have been used to recapitalize the banking system. Nothing much changes, in other words, except that it will get a bit more money. Presumably to help clean up the Agricultural Bank of China (ABC).
Of course, another report says that Central Huijin will become the state investment company, and be allowed to issue yuan bonds to finance its pile of foreign assets.
The government is expected to introduce a number of foreign exchange reform measures this year including setting up a state forex investment company, the China Securities Journal reported, citing a state official that it did not name. The government is likely to reorganize the central bank's investment arm, China Huijin Investment, into the forex company, which will buy and invest in foreign exchange reserves, using funds raised from the issue of yuan-denominated bonds, the report said.
That sounds a bit like Japan back when Japan’s Ministry of Finance used to issue yen bonds to buy dollars back in the pre-carry trade days of yen strength. The question I have is who will be responsible, in theory, for the losses Central Huijin (or any other investment vehicle) could take if the returns on their external investment don’t offset their capital losses from a strengthening yuan?
Suffice to say, early reporting is not entirely consistent. But something seems to be up. Reuters now has a summary of these reports up as well. Suffice to say that the reported $600b of Chinese holdings of Treasuries does somewhat undermine the overall credibility of the story, since, based on the US data, there is no way China holds $600b of Treasuries. $600b of Treasuries and Agencies maybe …
UPDATE: The FT — drawing on work by Barclay's Capital — has a bit of speculation on the potential impact of a big fall in central bank demand for bonds. As I noted in the comments, I rather suspect it will take a bit of time for China to set up some variant of the People's Investment Company — and at this stage, I wouldn't expect the People's Investment Company to just buy equities. Moreover, my personal expectation is that much of the fall off in official purchases by oil exporters — some recent work Rachel Ziemba and I have done indicates that oil central banks and oil investment funds added around $450b to their assets in 2006 — will be offset by a rise in Chinese purchases. I expect China's current account surplus to rise significantly, and for hot money inflows into China to pick up on the back of expectations of faster RMB appreciation and the strength of the local equity market. So I am not looking for central bank demand for US and European bonds to fall off a cliff — but I also would expect it to moderate somewhat as both China and the oil states without oil investment funds (the Saudis and the Russians) start to look to put their still growing stockpiles of funds to a bit better use.
Does this mean that:
A) The Chinese Central Bank will sell dollars to buy other assets through this new entity?
OR
B) The Chinese Central Bank will stop buying Treasuries in order to fund purchases by this new entity?
It would appear that one of these choices must be taken?
Thanks.
Most likely, the new entity will raise yuan to buy the PBoC’s existing portfolio, and then gradually sell some of those assets to finance the purchase of new assets.
the twist — China will still be accumulating reserves in 2007, so someone in China will still be buying something. So one way it could be done is that the SAFE would buy the safe assets held by the state investment co for cash out of its ongoing 07 reserve growth, giving the state investment co new funds to play with. but there certainly could be a change in the composition of the assets that China is buying on net if these changes come through. probably more of an 08 issue than an 07 issue tho. setting up a new institution takes a bit of time.
I would presume this means China will be buying fewer US treasuries or agencies. Can you estimate what effect this might have on US interest rates? Does it mean China will be selling 210B of US bonds?
PS It seems to me this was a long time coming. After having its bid for Unocal thwarted, I would have thought China would begin buying pieces of large foreign companies right away. One can’t prevent China from buying pieces, can one?
The State Foreign Exchange Investment Company will likely operate in a similar fashion to the Singapore’s Central Provident Fund. The Singapore government pension fund is a mandatory savings plan that finances the retirement for the citizens of the island nation state. In many respects, the Chinese economy has been modeled on the Singapore State-driven capitalism economic model. I suspect the Chinese foreign exchange reserves will largely fund infrastructure projects yielding higher returns both on capital and economic development for the nation. With the Chinese government arriving to a consensus, it is a major economic step that has been long overdue.
China for sure will be better off owning assets other than more US dollar bonds. Too bad for the bonds.
China won’t be a net seller of $210b. It will need to be a net buyer of $400b of something in 07. Suppose that the fund is set up late in 07, i.e. h2. China buys $200b worth of bonds in h1. and maybe $150 in bonds in h2 and $50b in equities … and if in 2008 China still needs to buy $400b in foreign assets and 1/2 is bought by the PBoC and 1/2 by the state investment co. and then say 1/2 of the State investment co’s portfolio is in bonds of various sorts and 1/2 in equities. China still ends up buying $300b in bonds.
Remember, China bought around $300b of foreign debt in 06, the PBoC bought around $220b (my estimate of its valuation adjusted reserve growth), and the BOP only works if the $45b in private purchases of foreign debt continued in h2.
If this was happenening in a context where China’s current account surplus was falling and FDI/ hot money wasn’t coming into China, it might mean some net reduction in Chinese demand for bonds. But i think the most likely outcome is simply a small reallocation of a growing pie toward equities and various higher risk assets over time. That forecast tho is premised on an assumption that the fall in the oil exporters surplus will be matched by a big rise in China’s surplus — something that is i think consistent with the q4 data.
Would it be reasonable to assume that China’s buying equities will tend to keep up the price of US and European (and also other) stocks? And if stocks were to fall in price, would China be likely to buy more of them?
I recall Jeremy Siegal (I think it was he) pointing out that babyboomers will soon begin to be net sellers of stocks to fund their retirement. He wondered where the demand would come from to absorb these sales. Might not China (and even perhaps India) be one of the principal buyers of these stocks babyboomers sell?
Unfortunately the SFEIC’s choices are highly limited, especially considering low much China’s currency reserves will be in the next few years.
Any significant investments in natural resources are limited by the fact that most governments prohibit foreigners from owning large stakes in their natural resource companies,look at Russia.
Sadly even though the SFEIC could easily scoop Intel or Microsoft similar CNOOC type fears on the part of the US government really prevent any substantive investment in such companies.
I’m a pessimest/realist there aren’t too real asset markets open to to the SFEIC. I have a feeling this will be a problem in and of itself somehow.
I’m curious if there are going to be huge purchases of companies in Latin America or Africa. SFIC could also make investments in domestic companies to fund purchases of assets overseas.
Also it’s likely that SAFE will be in charge of making the rules regarding foreign exchange, while all of the asset management will be done by the new entity.
My sense is that SAFE’s asset management arm would still be around (tho maybe divorced from the rest of SAFE) managing china’s reserve tranche — while other institutions managed the investment tranche. I also think SFIC would have a mandate limited to external investments — i.e. the foreign exchange part of its name. To help the PBoC out, it needs to issue domestic liabilities to buy external assets.
i am all for steps to increase (the right kind) of domestic investment and reduce China’s savings surplus, but i don’t think that is the issue right now.
If I were in China’s shoes, I buy resource-based equities in emerging market economies:
1) Additional capital flows will stimulate emerging market economies and demand for China’s exports.
2) Additional capital flows will raise emerging market currencies thereby improving China’s competetive advantage.
3) Emerging Markets should offer highest returns.
China will continue it’s state sponsored insider trading strategy, as they do in commodities. They always front run the futures market before slammimg the physical market with a timed purchase or sale.
No doubt they will do the same in the equities market, if they already haven’t.
Not a big fan of having an elephant like China pretending their just another investor. That’s almost as much BS as the rest of the China story.
What is to keep China from buying up US real estate properties? I would think any attempt to prevent the Chinese from buying US assets could be countered by China making it difficult or impossible for the US to invest in the Chinese economy. That might really hurt since it will grow far faster than the US economy.
I suggest they use the name The State Administration for Foreign Exchange Investment, Services and Holdings: SAFE-ISH
Then, further down the road when adjustable compensation packages for senior officials become de rigueur, they can set up the State Owned Stock Options arrangement: SO-SO.
* * *
Mr Lou Jiwei is a highly experienced technocrat and a very interesting guy. Amazingly, he’s been working with computers — in China — since the early 1970s, but not as an academic researcher. Real, practical stuff at Capital Iron & Steel Corp.
He was among the very, very top of the first post-Mao university generation (Qinghua, a/k/a China’s MIT, 1978-82) + grad school.
He started off working for then-Premier Zhao Ziyang on public finance issues, did a stint in Shanghai (1988-92 - very fortuitous timing: Jiang Zemin was party secretary and Zhu Rongji was Mayor!) before going back to Beijing for more high-level macroeconomic deregulation planning (VAT, province-central fiscal issues).
The leadership side-tracked him to a provincial job (vice governor of Guizhou, 1995-98), to broaden his background in the event that he was heading for higher posts, and he seems to have found the politics just not his cup of cha. He was named Finance Vice Minister just as the Asian Financial Crisis was winding down (August 1998).
Famous quote: “There’s no need to adjust the exchange rate in the near future.” [Nov 15, 2004]
More background:
http://www.mof.gov.cn/english/loujiwei.htm
http://www.washingtonpost.com/wp-srv/inatl/longterm/chinanext/chinanext17b.htm
http://www.washingtonpost.com/wp-srv/inatl/longterm/chinanext/chinanext17.htm
http://chinesepolitics.blogspot.com/2005/01/wsj-carried-very-good-story-about-xie.html
Central Huijin Investment Company (CHIC - love the acronym!), on the other hand, is run by a Wen Jiabao protégé named Xie Ping, who isn’t quite as senior.
Mr Xie ran PBoC research and financial risk departments, which makes him a good guy to step into banks where CHIC holds big shares, and the shenanigans are getting out of hand. One drawback to his career is that he’s been in the PBoC since 1988 - without gaining the broader experience someone like Mr Lou has.
* * *
Dave Chiang,
If the SAFISH is run like Singapore’s Central Provident Fund - taking money at very low ROI and no risk from citizens and funneling it at low lending rates into better paying, higher risk investments via SOEs such as Temasek that then keep the extra profit - China is completely and totally screwed over a very long time. Because of losses to the CPF, Singapore had to raise the retirement age, twice.
how about SAFExIT (SFX for Investment & Trade)?
protectionist sentiment and policies are building rapidly in china
http://www.washingtonpost.com/wp-dyn/content/article/2007/02/01/AR2007020101700.html
“protectionist sentiment and policies are building rapidly in china”
I view this as a sign that China’s economy is growing in both confidence and power. We saw the same thing in Russia with the country nearly on the brink of collapse and then rebounding with higher energy prices,enabling Russia to retire its Paris club debt.
Even in an “open” economy like the US foreign ownership is a hot issue. We only need to see the reaction to CNOOC and Dubai Ports.
In fact the US still has barriers to foreign media and airline ownership so obviously for the US to tell China that is analogous to the pot calling the kettle black.
Even in the UK fear of foreign control(by the US and not some Russian country) prevented the British from acquiring an excellent tank:the M-1 Abrahams.
Of course China wants to limit foreign control but what sense does that make China different from the US?
re: “huge purchases of companies in Latin America”
wondering if ‘the U.S.’ may have some capacity to limit or inflence in some way, ‘Chinese’ investment outside America.
“…U.S. trade with and investment in the region dwarf China’s, and is distinct from what China has to offer. We provide high-tech and knowledge-based goods and services. U.S. trade with the region exceeded $445 billion in 2004, ten times China’s level; Latin America’s exports to the U.S. are up 10 percent and imports from the U.S. are up 15 percent in the first half of this year. U.S. investment in Latin America is over $300 billion…” http://usinfo.state.gov/eap/Archive/2005/Sep/22-56242.html
re: “resource-based equities”
“More than 200 Canadian companies were under Chinese control in 1997…”
http://www.yorku.ca/nathanson/CurrentEvents/2000_Q3.htm#Chinese
“…the Chinese bureaucracy, especially in urban areas, has turned into “a grabbing hand,” a term coined by Professor Andrei Shleifer of Harvard University for the Russian state…. The biggest difficulty in assessing the ownership structure of China’s economy is that it is often unclear who controls a company… The critical difference between China and Japan is that much of the cross-holding share capital in China originates from the state sector… To provide a benchmark, compare China today with early 1980s India, an economy at the peak of economic statism. Under Indira Gandhi, India nationalised banks, restricted foreign investment and created numerous barriers for the private sector. Even at the height of all this, the importance of the Indian private sector far exceeded the level in China today. According to a 1989 World Bank report on India, the private-sector share of manufacturing output value declined from 93 per cent in the early 1960s to “only” 69 per cent in 1983. So China, after 28 years of reform and by a generous accounting of the size of the private sector, has not managed to create a private sector as large as that of India 10 years before that country began to reform.” http://www.ft.com/cms/s/057070f4-b263-11db-a79f-0000779e2340.html
“Tim Bond of Barclays Capital points out that the vast bulk of excess demand has come from foreign exchange reserve managers. He says the three most important - China, Japan and the oil producing countries - all have reasons to cut bond buying… China will struggle to find a home elsewhere for its reserves, given their size. But the risk should be priced more into longer-term investments.” http://www.ft.com/cms/s/b72b14ee-b262-11db-a79f-0000779e2340.html
How about this scenario?
In order to repatriate some of the profits being made off of Chinese labor, the SFEIC will be investing the reserves it controls in equity shares of non-Chinese multinationals that are using China as an export platform.
The SFEIC will hold only minority stakes, of course…
The challenge of China’s rise
by Reed Hundt
http://www.atimes.com/atimes/China_Business/IB03Cb01.html
” Reed Hundt, one of Intel’s board of directors and former chairman of the Federal Communications Commission under the administration of US president Bill Clinton, has written a new book titled In China’s Shadow: The Crisis of American Entrepreneurship that manages to avoid the pitfalls of much contemporary analysis on China, and consequently has something helpful and insightful to say about US-China relations.
Hundt’s belief is that the best way for the US to protect what it currently has - its standard of living, educational systems, world-class companies - is to encourage its citizens to take risks and innovate. Reading Hundt’s work, one has the sense that he believes it is likely US politicians will use China as a scapegoat for internal problems rather than as motivation to change the way the US must in the 21st century.
Hundt’s book hope is that the challenge China represents to America’s economic interests will be met by reinventing the United States, challenging its citizens to find new avenues to grow, and new venues for prosperity. To his credit, Hundt wishes the reader to move quickly from understanding the challenge China poses to framing this challenge within the context of a US need to reinvent industry, develop new technologies, and foster the next generation of entrepreneurs who will innovate their way to global success.
- Reed Hundt
http://www.atimes.com/atimes/China_Business/IB03Cb01.html
China aims to spend $200bn of reserves
By Zhou Jiangong
http://www.atimes.com/atimes/China_Business/IB03Cb08.html
” The $200 billion “bought out” from the foreign exchange reserves will then be injected into a new company to be set up this year to handle overseas investment with foreign reserves.
The new company, tentatively named National Foreign Exchange Investment Company, will be controlled by the State Council, China’s cabinet. It will spend funds from the foreign reserves on mergers and acquisitions of overseas businesses, including foreign financial institutions. It will also target overseas energy assets and will likely acquire equities in the domestic markets, or even lend money to help finance domestic research and development projects.
According to the People’s Bank of China, (PBoC), the central bank, the SAFE is responsible for the stewardship of the largest foreign exchange reserves in the world. It is estimated that over 60% of the reserves are invested in US Treasury bonds, with an annual return rate of about 3.5%.
It is risky to put all eggs in one basket. Also, the expected appreciation of the yuan is worrying the Chinese government. If the US dollars depreciate against the yuan by 5% this year, which is almost certain, the reserves will “shrink” by $50 billion against the yuan, equivalent to the amount of capital the Central Huijin Investment Co has injected into Industrial and Commercial Bank of China (ICBC), Bank of China (BOC) and China Construction Bank (CCB).
Such concerns finally prompted Beijing to decide to reform the management of its foreign exchange reserves. “
DC — thanks for the Asia times article. It gives a bit more useful detail. Seems like the State Council is taking at least one of my long-standing concerns (capital losses on $ holdings from an appreciating yuan) to heart, sort of.
DOR — your description of the people involved adds credibility to the report that the new institution, not CHIC, will get the bulk of China’s funds.
Yeah, Mr. Hundt, I can just see the USA “reinventing itself.” Lotsa luck, USA. What a hoot!
“…one sunny morning in April 2005, Chambishi was rocked by a huge blast. Earth shook and windowpanes broke in nearby houses. A runaway chemical reaction turned the BGRIMM facility into a giant fireball, pulverizing the entire structure. A total of 46 Zambian employees of BGRIMM were killed, their charred body parts strewn around the smoldering crater. Eyewitnesses say the Chinese staff had hurriedly driven away from the site shortly before this explosion occurred. Local residents theorize that the Chinese realized something was about to happen and didn’t bother warning African employees before fleeing themselves… Unable to identify individual remains, the victims’ families have had to bury plastic bags packed with flesh randomly collected at the site. Anger against the Chinese was intensified by widespread belief that safety rules had been flouted in pursuit of profit at the plant. “The Chinese didn’t care about our children — they just sacrificed them,” said Iris Chibuye, a grieving mother whose 24-year-old son Sledge and 27-year-old daughter Vennie, a computer technician educated in Britain, both died in the BGRIMM disaster.” http://online.wsj.com/article/SB117036261569895256.html
My general response to Yansheng Huang is Deng Xiaoping’s dictum that it doesn’t matter what color the cat is as long as it catches mice. Even with an infrastructure that is predominately state owned, the industries are generating value, efficiency is growing, and the economy is growing.
Guest (2/2/07 11:29):
Holier than who?
http://en.wikipedia.org/wiki/Bhopal_Disaster
i don’t think that’s the point, the US (and its MNCs) isn’t being accused of neocolonialist repression and facing a (sub)continental backlash on the scale that china currently is in africa. indeed, the US’ relationship w/ india is on the mend and improving, while china’s relationship w/ africa is fraying and appears to be deteriorating — precisely because the PRC is following a ‘western’ development model that it (and communism) has decried all along; propping up dictators and extracting mineral wealth without regard to the health and welfare of the general population… and, to stay on topic, this might complicate the people’s investment company’s ‘designs’ in africa in the same way that local uprisings ended the east india company’s tenure in south asia.
This is just questionable, for more knowledge about Chinese environment, pay close attention to RIC: http://www.researchinchina.com