We recently asked when China would begin to recycle its Sino-dollars, the huge $1 trillion in foreign exchange reserves it has built up by becoming exporter to the world. China appeared anomalous in its recycling efforts, compared with the much swifter movements by oil exporters in the 70′s and Japan in the 80′s to do the same thing. Apparently that process is finally about to begin in China. China is said to be creating a $210 billion investment fund which will will invest in financial and real assets, and apparently buy whole companies as well. AFP:

China will send ripples through the financial world when it unleashes an investment company with more money under management than any mutual fund in existence, according to analysts. The State Foreign Exchange Investment Company, which could be formed within just months, is expected to be in charge of 210 billion dollars, or one fifth the nation’s enormous foreign exchange reserves, they said.

“A company like that will definitely have an impact on global markets,” said Zhang Ming, a Beijing-based economist with the Chinese Academy of Social Sciences. “Other investors will be following it closely and try and guess its next move. They’ll buy assets that the company is likely to buy, and withdraw from markets if that’s what they believe the company will do,” he said.

The State Foreign Exchange Investment Company is expected to spend its money on a wide array of investment targets at home and abroad, from oil and gas to financial assets and entire companies, analysts said. It will get its huge bag of money as part of a plan to divide China’s 1.07 trillion dollars of reserves into three portions, the respected Southern Weekly paper said recently. Another 100 billion dollars from the reserves will be allocated to Central Huijin, a government investment arm, while 700 billion dollars will stay under management by the State Administration of Foreign Exchange, the paper said….

“In the long term, the company should become a national reserve asset management company, which should be able to earn returns higher than those from US Treasury bonds,” said Zhou Jiangong, a Shanghai-based economic analyst. In finance, the ideal portfolio offers high yields combined with low risk, but the problem is China’s forex portfolio increasingly looks like the exact opposite. It earns a relatively meagre return on its US Treasury bonds, and still has to contemplate the awful and very real risk of a plunging US dollar.

“The government is concerned about the prospect of a steep depreciation of the US dollar,” said Wang Qing, the Hong Kong-based chief economist with Bank of America. “Most of China’s forex reserves are in US-dollar assets, and it’s possible that the government wishes to diversify towards more assets in other currencies to reduce the potential loss from a falling dollar,” he said…They cite estimates that the share of US-dollar Treasury bonds is now 60 percent of China’s forex reserves, down from 70 percent five years ago…

The State Administration of Foreign Exchange, which currently handles the reserves, does not necessarily have the required expertise, according to Zhang Ming, a Beijing-based economist with the Chinese Academy of Social Sciences. “They’ve got a lot of experience with low-yield government bonds, but they know relatively little about other types of assets,” he said.

We’ll see how well this new group, The State Foreign Exchange Investment Company, functions when it is launched. Much depends on what kinds of assets the SFEIC actually decides to invest in, how large a part of any given market it tries to be, and whether it becomes extensively involved in the world of acquisitions. China has, in its development philosophy, tried to learn from the mistakes of others, and there were plenty of those in the previous Arab and Japanese diversification efforts.

This entry was posted on Sunday, February 11th, 2007 at 9:02 am and is filed under business, China, General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.