Given the determination of the group to establish the fund in the face of opposition from it’s own finance minister, and the required expenditure of political capital, one would have to wonder about the circumstances that have precipitated this move.
Are they afraid of yet more appreciation of the yen or is it something to do with participating in equity injections for troubled national or international financial institutions?

Perhaps you could confirm if my understanding as per the following is correct:

At each stage of the process, the funding or capital entry is/was denominated in RMB, even though the funds advanced are/were FX funds – i.e., the following balance sheet entries are/were denominated in RMB:

PBOC/Huijin; Huijin/banks; CIC/Huijin; CIC/CDB

But the funds that ended up with banks were FX, which the banks invested.

Because bank capital is denominated in RMB, the banks ended up with a currency mismatch.

So the banks could undertake forward contracts with PBOC to hedge that mismatch.

And CIC’s purchase (effectively) of PBOC’s interest in Huijin was the purchase of an RMB denominated asset with RMB, allowing PBOC to repay some its liabilities, thereby transferring that portion of the (ultimate) burden of sterilization from PBOC to CIC.

If the banks do hedge dollars (for example) forward with PBOC, then PBOC effectively retains some exposure to the US dollar (actual depreciation net of a rolling contracted differential), in addition to its on-balance sheet currency exposure (although it hasn’t had to sterilize the funding effect).

My opinion is when the SWF’s start to throw their weight around, we will see more of this sort of discussion. In my opinion it is the small Gulf Sheiks that will force the issue – they want to develop an income stream for when their oil runs out and I feel they will be the most aggressive in moving desirable jobs out of developed countries.

AS for Ferrari, at least in the Gulf they have the oil and flat roads to drive the things as they were meant to be driven.

there tho are complex macro issues if one reason for the fund in the first place is to support an exchange rate regime, and that supporting the exchange rate regime means investing abroad not home. the CIC has gotten around this by helping chinese firms raise funds to expand abroad, or by placing fx with Chinese state banks to invest abroad. but it is a real issue. some sov funds have to invest abroad, but want to do so in ways that support national economic development.

p.s. don’t forget about abu dhabi’s investment (through mubadala) in ferrari, the resulting ferrari theme park in abu dhabi … not a real threat, but still an interesting example of a two-fer kind of investment)

If I was Saudi, I would want to become a big payer in the energy industry both up and downstream, and yes, that means jobs. I would buy a chunk of a big engineering firm and force the work for plants in Saudi to be done in Saudi. I would also but up energy players around the globe to diversify by market and sector.

I hope you get my point.

you have every reason to be confused; it took me a couple of years to figure out how the bank recap worked (in large part b/c china wasn’t very transparent about how it worked).

in the initial recapitalization, the pboc lends fx to huijin (and who promises to pay the fx back to the central bank — creating a domestic asset). Huijin then hands the fx over to the banks in return for equity. The banks then have fx as part of their capital, which they can invest abroad. they also generally got the right to hedge their fx exposure with forward contracts with the central bank.

when the cic purchases huijin, it basically used some of the rmb 500b it raised initially to buy the pboc’s claim on huijin. the easiest way to think of it is as follows — the minfin raised rmb 500b, and bought $80b from the pboc. the minfin handed the fx over to the cic, which then paid $67b in fx for one of the pboc’s existing domestic assets. the net result was a $13b shift in fx to the CIC.

or put differently, the cic basically gave the pboc the fx it gave the banks back in 03/ 05 back, and in return gave some of its fx to the banks …

in all honesty, this could be accompanied simply by using some of the rmb 500b to buy the pboc’s domestic claim on huijin — and in effect for the cic to buy the fx exposure that was shifted to the banks back in 03 and 05.

I have confirmed tho the $13b fall in reserves from the $80b initial CDB allocation — and the basic accounting here. it is right.

the CDB recap is simpler — it was done in the same was as the earlier Huijin recaps of Boc and CCB. the CIC gives the CDB some fx (not clear if the CDB also got a hedge) and in return got CDB equity capital. that all works from a Balance of payments point of view so long as the CDB invests the fx abroad and doesn’t try to convert it back into rmb. basically, some of the CIC’s fx was handed over to the CDB to manage …

guest with the ICBC example — you hit the nail on the head. ICBC is very much state-owned, so there isn’t a deal that matches BoA/ CCB or goldman/ ICBC that doesn’t involve a major increase in Chinese state ownership of the US banking system. and given the way the state banks have been used in china historically and now, that is a bit worrisome. i understand the chinese desire for reciprocity, but the enormous difference between the us and chinese system makes it hard. the USG doesn’t own uS banks, and it doesn’t use them to support a currency policy designed to subsidize the US export sector.

guest — if the rest of the world wants less exposure to us fiscal and monetary policy, they should stop pegging to the dollar and building up their holdings of treasuries. easy. no need to set up a hedge fund to speculate against soros.

I’ve been reading your recent paper on China:

“The CIC’s initial funding was largely used to purchase of Huijin (the central bank’s bank recapitalization vehicle) and to complete the recapitalization of the large state banks. The CIC’s investment in Blackstone and Morgan Stanley are small relative to the CIC’s investment in the state banks.”

I’ve always been confused on this. The CIC was set up to manage some of China’s foreign currency assets instead of SAFE.

Was this recap exercise done in RMB denominated capital? I.e. was the recap separate from everything else in terms of its nil effect on FX reserves? Or was there an FX exposure involved here?

I would encourage the Thais to set up a SWF, recalling some guy named, ummm, Soros.

To be fair, what the world needs is a counterbalance against predatory hedge funds engaging in speculative attacks against currencies. And the most dangerous currency “hedge fund” of them all is none other than US Treasury and their friend, the Fed, which proxies for US commercial interests/Wall Street.

One would hope that SWFs can provide some international checks and balances, and stop asset bubbles in their tracks, and provide some measure of fiscal discipline to those in charge of world money supply.

Brad, I’m starting to get some bad vibes on how the SWF game may play out. If they evolve into Super Hedge Funds, they will really be able to cause tremendous mischief around the world. The West causes enough damage to it’s self, through it’s own financial shenanigans never mind what other groups with completely different political agendas might do.

Currently, in the West we have lousy financial schemes(usually ponzi), rogue traders, market manipulation by the PPT and others looking for political gains or unfair(manipulated) profits.

What happens when the SWF’s learn about these tricks and put them into play for their own long term political plans?

In particular I’m very worried about Russia and China. Both have countries with countless hackers that could be combined with current Super Computer technology that would give them superior hands to play in world markets.

We already know the answer: ICBC, though publicly listed, isn’t really- Chinese public listings are fraudulent, ICBC’s dealings are non-transparent, and ICBC really only answers to the State Council, not to its shareholders.