Yzerfontein Chronicles: China concerned about investment risk

Monday, March 16, 2009

China concerned about investment risk

Rare 1934 $500 Federal Reserve Note, featuring...

Comparative Risk and China’s Dollar Investments

I haven’t commented on Grandpa Wen’s recent concerns about the dollar and China’s exposure in this area. Lots of reporting on this story in all the major papers, including the back-and-forth between Obama and others in D.C. as well as folks here in Beijing.

This is fundamentally a political strategy issue, not an economic one. As such, it didn’t take long before someone ( FT in this case) did some reporting on China’s appetite for risk. Puts the criticism in context, doesn’t it?

China has lost tens of billions of dollars of its foreign exchange reserves through a poorly timed diversification into global equities just before world markets collapsed last year.

The State Administration of Foreign Exchange, the opaque manager of nearly $2,000bn (€1,547bn, £1,429bn) of reserves, started making huge bets on global stocks early in 2007 and continued this strategy at least until the collapse of the US mortgage finance providers Freddie Mac and Fannie Mae in July 2008, according to analysts and people familiar with Safe’s operations.

By that point Safe had moved well over 15 per cent of the country’s $1,800bn reserves into riskier assets, including equities and corporate bonds, according to people familiar with its strategy.

Now I’m not saying that China shouldn’t worry about the dollar. Any movement of the US currency will have profound implications for China’s bottom line, and there are many people out there expressing concerns about the long-term value of the dollar, particularly as the US government is running ever greater deficits in order to kick-start its economy out of the current recession.

On the other hand, Grandpa Wen’s comments do seem a little strange when you read about China’s initial movements into riskier products, and then its subsequent move back into Treasuries. If you need the safe haven, why talk it down?

The large shift into global equities appears to have started at around the time that Beijing approved the establishment of China Investment Corporation, the country’s official sovereign wealth fund, which has been widely criticised in China for incurring paper losses of around $4bn on high-profile investments in Morgan Stanley and Blackstone.

The bulk of Safe’s holdings remain in US Treasury bills and much of the loss on its riskier assets will be offset by gains on long-term bills, according to Mr Setser.

“They are a lot more cautious and risk-averse now and have basically returned to buying government bonds,” said someone who works with Safe.

China Business & Economy