Should SAFE be considered a SWF?

SAFE is China’s State Administration of Foreign Exchange. It enforces China’s capital controls -- and manages the foreign exchange reserves of China’s central bank.

Lately though it hasn’t necessarily been investing in classic central bank reserve assets. Participating in a TPG fund is something an aggressive sovereign fund might do, but not something a traditional central bank would even consider.

SAFE clearly wants to show that with enough flexibility, it can get the same kind of returns (or better returns) than the CIC.

If I had to bet, I would guess that SAFE now manages a larger equity portfolio (counting investment in private equity firms) than all but five or so of the big sovereign funds. ADIA, KIA, Norway’s government fund all likely have a bigger equity portfolio than SAFE. Temasek and the GIC likely to so too, though I am a bit less sure on that front. Temasek and the GIC combined likely have bigger equity market exposure than SAFE, but a lot depends on just how much equity SAFE has bought since June 2007 (the last good US data point). SAFE almost certainly has more equity market exposure than the CIC.

If China’s reserves continue to increase at $75-80 billion a month, SAFE could quickly become among the biggest sovereign equity investors.

The FT’s sovereign fund (and PE) beat reporter Henny Sender was struck by how large SAFE’s investment in the TPG fund was.

China’s State Administration of Foreign Exchange has agreed to invest more than $2.5bn in the latest TPG fund, in what could be the largest commitment ever made to a private equity firm, people familiar with the matter say ... Investments in private equity firms are usually not made public, but industry executives believe the largest previous investment in a private equity firm came from pension funds in the US states of Oregon and Washington. The two funds both invested about $1bn to $1.5bn in Kohlberg Kravis Roberts.

I though am struck by the fact that $2.5 billion is less than a day’s reserve growth, and thus not really all that much money for China. $75 billion -- really $80 billion after valuation changes are taken into account -- translates into something like $4 billion to invest every business day.

The scale of China’s April reserve growth -- and indeed China’s 2008 reserve growth, once the funds China is assumed to have shifted to the CIC in q1 are taken into account -- is truly astonishing. China’s $75 billion in April reserve growth easily tops the United States $61 billion April trade deficit. And $60 billion a month still strikes me as a lot.