from Follow the Money

The People’s Investment Company - the early reports

February 1, 2007

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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.

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