FYI | May 22 2007
By Greg Peel
For a while now the Chinese government has been concerned with its concentration of investment in US Treasury bonds. As its current account surplus with the US continues to grow, much to the disquiet of the world, China has been contemplating more prudent measures – measures which diversify the investment of foreign exchange reserves.
To that end it has been a consideration to implement some currency diversification, into, for example, the euro, and also to contemplate a greater investment in gold, of which the Chinese government holds relatively little. But apart from currency diversification from a prudential perspective, the other consideration is one of actually getting some bang for the buck. To that end, the Chinese government recently set up a US$300 billion trading company with a mandate to invest in higher-return instruments such as equities, property and commodities.
That mandate was on display last night as China poured US$3 billion into a US investment fund. Not just any investment fund, but the second biggest private equity investment fund in the US – Blackstone Group. Blackstone is planning an IPO soon, and has recently been on a buying binge, including last week’s US$6.5 billion buyout of Alliance Data Systems.
Does this signal the final end to any concept of lingering Chinese communism? The government is investing in a fund that specialises in acquiring companies that, although representing private enterprise, are publicly-listed, providing investment access for all. The fund then takes those companies fully private – implying investment for the chosen few, the capitalist elite – before attempting to re-list for public investment at a later date and an expected profit. I wonder what Mao Zedong would think of that little scheme.
But before the government trading company got in on the act, the recent relaxation of investment laws in China, such that locals now have (albeit limited) access to foreign markets, has meant that China’s cash-rich banks, insurers and pension funds are now out in the world looking for opportunities wherever they may find them. As London’s Financial Times puts it:
"It is a shift that has been hailed as a potential ‘wall of money’ to hit equity markets such as Hong Kong, the first port of call for many Chinese investors. Beijing hopes to use controlled outflows to slow the growth of its ballooning foreign exchange reserves, the world’s largest at $1,202 billion."
And the race is on between foreign firms to be part of this "holy grail" of asset allocation. The government’s new trading company has followed hot on the heels of the Chinese US$50 billion state pension fund which recently appointed foreign institutions to manage US$1.5 billion of foreign investments.
The Chinese people have for a long time been savers, and the amount of money held in savings accounts totals some US$2.5 billion (or more according to some accounts). Real deposit rates in China are negative, meaning returns do not exceed inflation. Thus putting one’s yuan in the bank or similar traditional savings account is actually a way to lose money. Now that foreign investment laws have been relaxed, the world is the Chinaman’s oyster. Witness the extraordinary scramble occurring at present into the local Chinese stock market. The Chinese government were forced to relax investment laws not just as a requirement to become part of the global financial marketplace, but as a pressure valve for the asset bubbles building locally. That money also now has access to markets across the globe.