SAFE, SWF
SAFE is China’s State Administration of Foreign Exchange, the body charged with managing the bulk of China’s reserves. It generally isn’t considered a sovereign wealth fund (SWF). Central banks generally manage a portfolio of safe, liquid assets — government bonds and the like. Some do invest in equities, but generally they prefer equity index funds and the like.
Sovereign funds by contrast are willing to take large and illiquid stakes in companies in the hope of getting better returns.
The line though isn’t all that clear — some aggressive central banks hold a riskier portfolio than some conservative sovereign funds.
And there are growing signs that the State Administration of Foreign Exchange is becoming more aggressive. It has bought a set of stakes in Australian companies. It recently indicated that it had bought a sizable stake in the French oil company Total. The latest US capital flows data also suggests a meaningful increase in China’s purchases of US equities. That increase preceded the formation of the CIC, and best I can tell, most of the ongoing purchases are coming from SAFE not the CIC. Until it gets the last tranche of its initial round of funding (something that should be marked by a noticeable fall in China’s reserves), the CIC doesn’t actually have all that much money to invest — most has already been committed to Huijin, China Development Bank, Blackstone and Morgan Stanley.
SAFE’s growing willingness to take risks isn’t a total surprise — it already has way more liquid assets than it needs, and it was reasonably clear when I visited Beijing that SAFE views the CIC as a rival. SAFE likely wants to show that it can invest as well as the CIC, at a far lower cost. China’s central bank doesn’t want another agency to take over the management of too many of China’s foreign assets.
But SAFE’s new policy also raises a host of issues — both for China and for the world.
China’s authorities have to worry that the CIC and SAFE may end up bidding against each other. And, as the FT (McGregor, Hollinger and Sender) notes, SAFE’s investments are likely to raise almost as many concerns as the CIC’s:
SAFE’s more aggressive investment posture in the wake of the setting up of CIC has caused divisions at the top of the Chinese government, because of concerns that two agencies could be competing in what is already a sensitive area for Beijing.
CIC’s attempts to establish itself in the global investment community as a transparent and independent investment entity – a challenge, given the focus both on China and sovereign funds generally – is also being damaged by SAFE’s new assertiveness, Chinese officials said.
The CIC’s total foreign portfolio is still small — and it will remain relatively small even after it gets its second $100b. Two-thirds of its initial $200b have been committed to the domestic banks.
SAFE by contrast is huge. And its assets are growing incredibly fast. Judging from January and February data, the annual increase in China’s reserves is now bigger than Russia’s total reserves — and roughly equal in size to a reasonable estimate of ADIA’s portfolio.
And ADIA (the Abu Dhabi Investment Authority) is the world’s largest sovereign fund.
My guess is that the reallocation of SAFE’s portfolio is still quite modest. $5b a month in equity purchases would still leave roughly $45b a month for bond purchases. If that ratio ever reverses itself, watch out.
With China’s foreign assets rising by $600b annually, it actually isn’t hard to envision a world where China alone — through SAFE, the CIC or another vehicle — buys more US equities than the rest of the world combined (politics permitting, of course). Total (net) foreign portfolio purchases of US equities in 2007 were only about $200b.
Right now SAFE needs to place roughly $2.5b a working day day. 1.6% of TOTAL only cost $2.8b. Do the math …
what if china’s economy implodes?
One might better ask, “What if the economy of China’s largest trading partners implode?” Anonymous. China has enormous reserves and is capable of keeping its economy running in the face of very strong headwinds (not to mention that it also has a government that tends to be very hands-on). But if the economies of the trading partners implodes, the assets on which those reserves are based will tank.
China CIC negotiating complete purchase of Germany’s Dresdner Bank from Dutch Allianz Insurance
http://www.forbes.com/markets/feeds/afx/2008/03/27/afx4820154.html
FRANKFURT (Thomson Financial) - Allianz SE is in ‘intensive’ negotiations with China’s state-fund China Investment Corporation (CIC) over the sale of its banking unit Dresdner Bank, Sueddeutsche Zeitung reported, citing industry sources.
The report said CIC is seeking to acquire both Dresdner’s retail business as well as its investment banking operations.
China CIC invests $100 million in Visa IPO
The Associated Press - Mar 25, 2008
http://ap.google.com/article/ALeqM5hLoS3n8fKmbiQ1jXGKgpWkRp0S5gD8VKG4JG3
China Investment Corp., or CIC, invested more than $100 million as a strategic investor in the Visa IPO share offering, Caijing said, citing unnamed sources.
China CIC buys Euro 1.9 billion stake in France Total
http://us.ft.com/ftgateway/superpage.ft?news_id=fto040320081207056984&referrer_id=yahoofinance
The Chinese body charged with managing the bulk of the country’s $1,650bn in foreign exchange reserves has bought a 1.6 per cent stake in Total, the French oil company, signalling a more aggressive approach to investing the funds under its control.
China’s State Administration of Foreign Exchange began building its stake several months ago, according to a person close to the company. Total (NYSE:TOT) is France’s most profitable company and the world’s fourth largest oil group.
the Dresner rumor has been denied — and to my mind it would be a strange purchase, as it would only add to the CIC’s huge financial sector overweight
The definition of an SWF is a work in progress.
“…Its economy will save the world from a global recession because it doesn’t just sell to Wal-Mart - it also sells to its own citizens. Therefore - so goes the popular view - the current Chinese market correction is a buying opportunity. Is it? I humbly beg to differ… China reminds me of Japan of 1990 or Nortel of 2000… the real problem is not the Chinese corruption, but what economists call “misallocation of capital” - costly factories that sell stuff at less than full production cost - because if full cost of capital were charged, the product would sell at half the volume or even not at all… In China, too, quite a few Chinese industry IOUs to Chinese banks are worth little. Just like IOUs of Japanese companies to Japanese banks in the ’80s. Just like Nortel’s IOUs of the late ’90s.For a while no one cared about Japanese and Nortel’s costing, until it finally hit; and now, I believe, it begins to hit in China too: The Hong Kong Hang Seng market index is already plunging. Chinese land prices and property prices ditto…” http://www.theglobeandmail.com/servlet/story/LAC.20080329.STBUYSIDE29/TPStory/?query=china
“…So they think China can go from 25% annualized inflation to 2% annualized inflation over the rest of the year? I’m not sure I’d want to take their side of that bet.” http://piaohaoreport.sampasite.com/blog/Waiting-for-the-CPI-inflation-re.htm
speaking of dresdner, where is this at brad?
“…Basically, Mr Abadi is asking the former Refco customers to move their accounts to the trading arm of the Dresdner Bank… That is an interesting way for Mr Abadi to build a large business quickly, and for Dresdner to increase its share of the prime brokerage business… Mr Abadi, through Dresdner, will give the customers standard prime broker terms on lending against illiquid or off-the-run securities. And unlike Refco, their assets will not be commingled or lent to other entities controlled by the parent…” http://www.ft.com/cms/s/2/19197600-103d-11db-8f6f-0000779e2340.html
anonymous — no clue. and way off topic.
not at all brad - this type of information may provide some insight into the asset and why it might not be for sale to an swf, or at least certain buyers, at any price - along with many other assets.
Major Chinese bank wants stake in South Africa’s second-largest lender
http://www.sinodaily.com/2006/080404044055.4dndkb1i.html
A major, but unidentified Chinese bank is in talks to buy a stake in South Africa’s second-largest lender First National Bank, the state-controlled China Daily newspaper reported Friday.
If carried out, the transaction will follow in the footsteps of Industrial and Commercial Bank of China, the nation’s top lender, which recently agreed to buy a 20 percent stake in South Africa’s Standard Bank.
The Chinese bank, a state-owned one, has been negotiating with FNB for a long time.
GOo Xinqing’s highly entertaining defense of non-transparency has at its core the Bush-like straw man defense of non-transparency: that SWF’s can’t be transparent, since you can’t let everyone know what you’re going to invest in before you do it.
Well, I don’t think anyone’s asking them to do that.
Further to the point, it looks like the PRC doesn’t have control of their competing investment agencies and may move ahead Dubai-like. This will be good for international capital markets, but shows just how fragile the Chinese top-down-control is getting.
With Sec. Paulson saying Chinese business is standing in the way of important reforms, there might be some changes afoot in this non-democracy. Wouldn’t that be something if their choking on T-Bills is the coup de grace then turns them into a Jeffersionian democracy?
The “genius” of Bush’s big debt run up will be up their with the “genius” of Reagan’s bankrupting the Soviets with his big defense spending, only Bush made our enemies rich. I can just hear the GOP spinmeister’s looms…
i continue to find Gao’s statements to the effect that the CIC doesn’t make “political” investments surprising, as the biggest share of its portfolio is occupied by the CIC’s strategic stakes in china’s state banking system, whick strkes me as intrinsically political. that doesn’t mean other CIC investments are political, but it does raise a few hard and complicated questions.
the question of whether there is coordination among the various state investment agencies or simply pure competition is an interesting one — especially given that hte state banks have a lot of fx as well so there are more than 2 players. and the cic’s continued financial sector focus — see the latest Flowers investment — is also a bit of a puzzle. it increasingly looks like a specialized agency focusing on hte financial sector (which could be semi-strategic) rather than the manager of a broad diversified portfolio.
I frankly am more than a bit confused …
and yes it would be amusing if a revolt by ordinary chinese against subsidizing the us and “w” prompts a new wave of democratic accountability ..
Brad
the Chinese banking system , in certain aspects, is similar to its state-owned industries- there are kinks which need to be reformed and recapitalisation is absolutely neccessary; CIC’s strategic stakes in china’s state banking system as you’ve referred to it might just be the mechanism for both proccesses.
the CIC’s bid to concentrate on the financial sector might well be for 2 reasons; the crisis makes it easier to get at fish that might otherwise be cruising the oceans, when the crisis drives them to shore for financing , the temptation is to catch them. Of course that might just mean catching part of a rotten lot but no pain , no gain. Another reason that some commentators have noted; they lack the experience and expertise that IBs have in abundance, whether it is to tap into existing expertise or simply to set up training structures for future talent , buying into the financial sector could provide training grounds.
That’s just speculation but who knows?
I Wouldnt worry about CIC (or other chinese folks) buying stuff
Not too long ago, US folks like KKR bought shi* load of companies and soon they are out of news. china will follow suit once liquidity dries up.
Lets discuss something more “gravitatious” here….
Judy — i would think that the recent crisis has reduced the going price for the advice wall street can offer. i sort of doubt China wants to take financial advice from blackstone right about now.
indian banker — i disagree. China is now buying at least $600b in foreign assets. that is probably too low a number. its current account surplus is huge and shows no real sign of falling. capital inflows into china are rising. the trend on china’s official foreign asset growth is still up. China’s government alone may add more to its foreign assets in 08 than all the oil exporters combined. Its “gravitational pull” is huge. Its liquidity isn’t drying up.
Brad
Made those guesses on the assumption that Wall Street doesn’t go to the dogs , well, not completely anyway in this crisis. As for advice, maybe not Blackstone but frankly, the impression (probably wrong) is that the Chinese government as well as the management of CIC seems to “prefer” Morgan Stanley and Goldman over the rest of the wall street pack, but who knows?! (shrug)