Thursday, 15 December 2011

New China sovereign fund of US$300b on the way

It will invest in real assets, given the dismal returns on US, Europe bonds


Guanyu 道 said...

New China sovereign fund of US$300b on the way

It will invest in real assets, given the dismal returns on US, Europe bonds

14 December 2011

China's central bank has announced plans to create a new sovereign wealth fund to manage US$300 billion in foreign reserves, in the clearest sign yet of Beijing's waning faith in bonds issued by Europe and the United States.

Europe's festering debt debacle, record low yields on US Treasuries and a depreciating US dollar all add weight to the view in China that the time is ripe to change investment tack.

The investment vehicle is expected to operate two funds that pursue 'more aggressive' investments in the US and Europe markets to generate higher returns, the report said. Market analysts believe the move is as much a warning to Washington as it is a blow to Brussels.

'China has decided that real assets are better than broken debt fix promises and low interest rates,' says Paul Markowski, president of MES Advisers and a long-time external adviser to China's monetary policymakers on global financial markets.

Beijing has watched for two years as Europe's crisis has choked growth and demand in China's biggest export market and stoked default risks on the near US$800 billion of eurozone government bonds it is estimated to own.

It has been a painful lesson.

After all, China had actively bought euro assets to guard its US$3.2 trillion reserve pile against over-exposure to the US dollar, which has lost about a third of its value in the last 10 years as US Treasury yields have sunk to record lows.

It was reported last week that the People's Bank of China plans to create the new vehicle with two funds, one for Europe and one for the US, making China in aggregate the world's biggest sovereign wealth fund investor. The plan originated before Europe's debt crisis, sources said.

That gels with comments from investment sources with links to China's monetary authorities and foreign reserve managers who detect a clear desire in Beijing to acquire real assets in return for supplying fresh funds to bridge US deficits and recapitalise European financial institutions and governments.

The US$300 billion figure is consistent with the sum that Mr Markowski and others calculate that China has in excess reserves - the amount beyond what Beijing would need to tackle a balance of payments crisis or a domestic funding emergency.

'They want underlying assets. Equities, corporate bonds, real estate - anything that governments want to flog,' said one source involved in foreign exchange trading for official institutions such as central banks.

The source singled out bidding for the Portuguese government's stake in utility firm Energias de Portugal, which would net roughly 2.5 billion euros for Lisbon, as typical of the path indebted countries will have to follow in future to persuade reserve managers to part with additional cash.

Granted, Chinese investors won't be warmly received everywhere - a sovereign wealth fund showing up in Paris or Madrid with an offer to buy up public infrastructure would probably come away disappointed.

'It's easier said than done,' said one Hong Kong-based investment banker who has advised Chinese clients on overseas acquisitions. 'One idea is that China could buy up agricultural land. They've also eyed ports in the past. They just don't want to do anything that's politically unpopular.'

There are domestic pressures, too. China Investment Corp (CIC), the country's existing sovereign wealth fund, was sharply criticised within China for money-losing investments in US investment bank Morgan Stanley and private equity firm Blackstone Group in 2007.

Guanyu 道 said...

But with a European debt crisis and the US triple-A rating no longer a given, China's state investors have good reasons to push into new kinds of assets.

'There is a great deal of discomfort (among reserve managers) over what the concept of a risk-free asset is,' said Gary Smith, London-based global head of official institutions at BNP Paribas Investment Partners.

Data shows that China's shift into real-world assets is under way. China's outward foreign direct investment (FDI) hit US$68 billion in 2010 after more than doubling in 2008 to US$52 billion from US$23 billion in 2007, according to Karl Sauvant, executive director of the Vale Columbia Centre on Sustainable International Investment at Columbia University and a specialist in global FDI.

Mr Sauvant's institute estimates that China would strike US$1 trillion to US$2 trillion in FDI deals over the coming decade, adding to its existing portfolio of over US$300 billion.