SAFE Hires Top Fund Manager to Diversify Reserve Investment

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China's State Administration of Foreign Exchange (SAFE)

 

PIMCO is the world's largest bond fund, and manages assets of $940 billion as of the third quarter of this year. Zhu is responsible for a group of hedge funds under PIMCO and is also on the company's investment committee as the head of derivatives department. When he goes to work for SAFE, he will become the manager of the world's largest fund.

 

Since the outbreak of the financial crisis, Chinese financial institutions have frequently gone abroad to recruit talent. But according to Wall Street Ren, an association of Chinese Wall Street professionals, in the past two years, few top talents returned to work for Chinese-funded organizations, and managing directors were even fewer.

 

Wu Xiangyang, a managing director at JP Morgan Chase and head of its main-class mortgage securities department, says, "That SAFE recruits talent like Zhu Changhong means its investment will reach a new and higher level, more mature and sophisticated, helping to improve its overall investment performance. Mr. Zhu is a top-notch talent in derivatives among Chinese professionals."

 

Mr. Zhu, along with Mr. Wu, is an alumnus of the University of Technology of China (USTC), located at Hefei, in Anhui Province. Zhu Changhong graduated from there in 1989 with a bachelor's degree in physics, and earned its highest honor, a Kuo Moruo scholarship. He furthered his education in the US and received a doctorate in physics from the University of Chicago in 1994. In the same year, he hired on at the Bank of America, and the model of interest rates and mortgage loans he established played an important role in interest rate risk and the relative transaction value protection for the bank. In 1999, Mr. Zhu joined PIMCO and worked as portfolio manager of sectors of government bonds, agency bonds and derivatives. His investment experience is largely consistent with assets held by SAFE.

 

Mr. Zhu was promoted to managing director in 2005. Though still a relatively young 39 years old, he is currently responsible for managing the $23 billion hedge fund family with "absolute return strategy" for PIMCO.

 

China's foreign exchange reserves are managed by SAFE's Reserves Division, which currently employs 300 people worldwide, 250-260 of those in the Beijing headquarters. It comprises nearly 20 departments, ranging from asset allocation, investment management, risk management, clearing, accounting, and compliance, among others.

 

China's foreign exchange reserves of $2.3 trillion are operated in international financial markets 24 hours every day. Currently the Reserve Division has established four overseas branches: trading rooms in both New York and London, a SAFE Investment Company in Hong Kong, and a People's Republic of China Investment Company in Singapore.

 

This last July, central bank Deputy Governor Yi Gang replaced Hu Xiaolian as a part-time deputy of SAFE and has made efforts to attract overseas talents to return to work for their motherland. Yi, who once lived in the US for 14 years and was a tenured professor at Indiana University, is now one of the highest-ranking returnees among Chinese government officials.

 

The latest US Treasury International Capital Flows (TIC) report shows that China holds $798.9 billion in US treasuries at the end of 2009, of which $135.4 billion, about 17%, is in short-term treasury bonds. China is the largest holder of US Treasury bonds.

 

China also holds long-term US agency debt of $479.8 billion, $24.5 billion long-term corporate bonds, and $100.8 billion in stocks. Assets held total about $1.4 trillion, accounting for about 62% of China's foreign exchange reserves. It is generally believed that US assets in China's foreign reserve actually total more than 70%.

 

Chinese Premier Wen Jiabao in March said: "We have lent huge amounts of money to the US, and we are concerned about the safety of our assets. To be honest, I do worry about it."

 

Paul Krugman, a recent Economics Nobel laureate and a New York Times columnist, believes that dollar depreciation may lead to 20%-30% loss for China's investment in the US. "China is heavily trapped in the US dollar. The configuration of diversified investment will certainly result in capital loss."

 

Some analysts believe SAFE's recruitment of Mr. Zhu means the expansion of investment of foreign reserves. It is estimated that SAFE's hedge fund investment is greater than that of China Investment Corporation.

 

According to a US Treasury Department report, China held US stocks of $100 by the end of last June, more than three times of the total positions of June 2007. This shows that China has continued large-scale buying of US stocks even after sub-prime mortgage crisis. This part of the investment may still be in the red because of the US stock market crash.

 

Before the outbreak of the global financial crisis, SAFE began developing share holdings in global energy, resources, and financial companies, such as British Petroleum, Total, Rio Tinto and Australian banks.

 

SAFE has also invested in private equity funds such as TPG, focusing on investing in financial services company. The fund was invested in Washington Mutual Bank, which failed spectacularly in the financial crisis, leading to a big time loss for SAFE.

 

This year in April, SAFE director Hu Xiaolian disclosed that China had gradually increased its gold holdings from 454 tons to 1054 tons. Gold reserves still less than 2% of the total foreign exchange reserves.