China to create $300 b FX investment vehicle

Monday, 12 December 2011 00:00 - - {{hitsCtrl.values.hits}}

Reuters: China’s central bank plans to create a new vehicle to manage investment funds worth a total of $300 billion to improve returns on the world’s largest stockpile of foreign exchange reserves, a source with knowledge of the matter told Reuters.

The vehicle, which was planned well before the start of Europe’s debt crisis and is aimed at improving returns on China’s foreign exchange reserves, would operate two funds, one targeting investments in the United States and the other focused on Europe, said the source, who asked not to be named because of the sensitivity of the matter.

The vehicle’s goal is to make more aggressive overseas investments for higher returns, said the source along with a second, independent source, who also declined to be named.

Details of the venture are still under discussion, but key personnel for managing the venture have been agreed upon, the sources said.

The investment vehicle would be affiliated with China’s State Administration of Foreign Exchange, the part of the central bank in charge of the daily management of China’s $3.2 trillion in foreign exchange reserves.

One of the funds would be named Hua Mei, or China-US, for investments in the United States, and the other is named Hua Ou, or China-Europe, for investments in European markets.

The style of the funds will be similar to the low-key Hong Kong-based Hua An, also known in English as SAFE Investment Company Ltd, said the source, through which SAFE has purchased stocks in dozens of overseas listed companies.

The People’s Bank of China, the central bank, was not immediately available for comment.

China’s leaders have said recently that they will seek investments in the real economies of the United States and Europe, apart from their routine investments in government debt.

The second source said the new venture would likely be based in Shanghai and may also sell yuan bonds in the domestic market.

“The company will issue yuan bonds,” the source said. “Then it can use the yuan to buy foreign currency from the central bank or even commercial banks for overseas investment.”

When China created the China Investment Corp, the country’s sovereign wealth fund, in 2007, China’s Ministry of Finance issued 1.55 trillion yuan special yuan bonds to swap yuan for $200 billion worth of foreign currency from SAFE as the initial batch of funds for CIC to manage.

A similar arrangement is expected for the new vehicle.

CIC, which operates independently of the central bank, recorded a 11.7 per cent investment return in 2010. It has been applying for new funds from SAFE as it has developed its portfolio.

In a public speech in April 2011, Chinese central bank governor Zhou Xiaochuan said that China may set up new ventures to manage its foreign exchange reserves. “Don’t put all your eggs in one basket,” Zhou said. “One option is to create some new ventures to try new investment styles and fields.”