China investment arm emerges from shadows

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For more than a decade, China’s State Administration of Foreign Exchange (Safe) has maintained outposts in Hong Kong, Singapore, London and New York to help manage the nation’s rapidly expanding foreign exchange reserves.

These subsidiaries have largely avoided public scrutiny and until now have concentrated on investing the nation’s foreign exchange reserves in safe and liquid assets such as US Treasury bonds.

But a series of small equity investments by Safe’s Hong Kong subsidiary in three of Australia’s largest banks – Australia and New Zealand Bank, Commonwealth Bank of Australia and National Australia Bank – in the past two months has raised new questions over the transparency of Chinese investments.

It also comes at a time when Chinese state-owned companies’ increasing presence overseas and the creation of government bodies such as China Investment Corp, a new $200bn sovereign wealth fund, are causing angst in some quarters over the power China is beginning to wield in global markets.

Located in downtown Hong Kong, Safe Investment Company is one of the largest customers for local Treasury bond trading desks at banks such as Morgan Stanley and yet almost nobody in the wider financial community has heard of it.

It is a direct subsidiary of Safe, the government department that regulates foreign exchange transactions and also manages China’s nearly $1,500bn in foreign exchange reserves.

But the entity is so secret that Safe repeatedly refused to acknowledge its existence to the FT, until it was confronted with incontrovertible evidence.

China’s central bank, which ultimately controls Safe, told the FT that Safe Investments was set up just one month before the hand-over of Hong Kong from Great Britain to China in 1997 to “support and promote the development of Hong Kong’s financial market” and served a crucial role in defending the value of the Renminbi and Hong Kong’s peg to the US dollar against international speculators.

According to people familiar with Safe Investment’s operations, it served largely as a minor outpost for Safe in the years following the Asian financial crisis, with only about $20bn in funds under management.

But the amount under management at Safe outposts has increased substantially, according to one person familiar with its operations.

“Safe’s subsidiaries around the world have until now been responsible for running Safe’s book over the various time zones and have basically replicated the portfolio of head office in Beijing but that appears to be changing with the Hong Kong subsidiary taking more risk in managing reserves,” the person said.

Safe’s main office in Beijing manages portfolios of fixed income securities such as Treasury bonds, currencies and commodities, according to a person familiar with its operations, who said it is common for Safe to execute trades of up to $1bn at a time.

Analysts say internal politics may account for Safe diversifying away from its previous mandate of low-risk liquid securities, albeit on a relatively small and carefully concealed scale.

“This shows characteristics of a Chinese bureaucratic rivalry,” according to Arthur Kroeber, managing director of Dragonomics, an independent research firm. “It might be that, having been forced to surrender control of Huijin to CIC, Safe and the central bank are now lobbying for authority to make alternative investments on their own account.”

CIC was established last September to make better returns on a portion of the country’s foreign exchange reserves through riskier investments.

Although a Ministry-level entity, CIC was set up under the auspices of the Ministry of Finance, long seen as a rival to the central bank when it comes to controlling the country’s financial assets, including its largest banks.

Huijin was set up a few years ago, under the control of Safe, as the government’s holding company for state-owned banks and securities firms but CIC spent about a third of its initial $200bn acquiring Huijin, snatching control of the banks away from the central bank.

CIC officials have stressed they will make global investments in the most transparent way possible.

But Mr Kroeber says: “Even if CIC honours its pledge . . . there are a lot of other Chinese state entities investing a lot of money abroad in a much less transparent manner.”

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