March 15,2010

SAFE's Billions Slipping into US, Foreign Markets

By CSC staff, Shanghai

The State Administration of Foreign Exchange(SAFE), the agency stewarding China's $2.4 trillion foreign exchange reserves under the People's Bank of China, has invested billions of dollars in a number of US hedge funds and asset management firms, including Pacific Investment Management Co,(PIMCO)、BlackRock, and Bridgewater Associates.
 
Two weeks ago, the US-China Economic and Security Review Commission held a hearing on China's investment in the US. Derek Scissors, a research fellow of Heritage Foundation, said that SAFE's many deals with US funds are "pretty sure."

 
At the end of 2009, when SAFE officers were hiring in New York City, one of them said to 21st Century Business Herald, a leading Chinese newspaper, "SAFE's investment has spread to major instruments and markets." SAFE hires external fund managers, but not as many as China Investment Corporation, China's sovereign wealth fund, has, according to the officer.
 
Zhu Changhong, SAFE's newly appointed chief investment officer, was a member of PIMCO's Investment commission, doing derivatives investment and managing an internal hedge fund series. According to Wall Street analysts, SAFE has been investing in US asset management firms for four to five years, not quite a secret on Wall Street but a top secret in its home country.
 
PIMCO's office in Beijing has good relations with SAFE. A chunk of SAFE's funds in PIMCO are invested in an instrument called Long Only Fixed-Income Mortgages, likely in the Total Return fund managed by Bill Gross, PIMCO's chief investment officer. Total Return has been one of the best performing bond funds in decades. SAFE also invested in PIMCO's internal hedge fund,which was managed by Zhu Changhong. Some analysts estimated that SAFE may have more invested in hedge funds than does CIC.
 
BlackRock also manages some of SAFE's money. BlackRock established its office in Beijing in 2008 and has been close to SAFE. With almost the same strategy as PIMCO, Blackrock put SAFE's money into long only fixed-income mortgages, Treasury bonds, and inflation-protected securities,as well as mortgage bonds.
 
In April 2009, BlackRock CEO Laurence Fink visited Beijing to seek investors for distressed US assets. BlackRock participated in the private-public partnership purchasing bad assets from banks. They targeted sovereign wealth funds. CIC invest 530 million dollars in BlackRock.
 
Bridgewater Associates is a leading hedge fund firm in the world. The founder Raymond Dalio donated $500,000 to Sichuan earthquake relief. Mr. Dalio is also the director of a charity called "Caring China." SAFE has a close relationship with Bridgewater Associates. Mr. Dalio's son Matthew studies in Beijing and has had a Chinese girlfriend. It was Matthew who founded the charity when he was 16. Another director of the charity, Ms. Gu Zeqing, once a government trade official, was the managing director of Bridgewater's office in Beijing.
 
Derek Scissors is working on a China Global Investment Tracker that includes data of China's deals confirmed by public information 2005-2009.

Besides SAFE's investment in Treasury bonds, it has made four investment deals overseas, all done during the height of the financial crisis in 2008.

In 2008, SAFE bought 1% stakes in Australia-New Zealand Bank,Australia Bank, and Australia Federal Bank for US$180 million, a 1% stake in BP of UK for US$2 billion, a 1.6% stake in Total of France for US$2.8 billion, and a 20% stake in TPG, a US private equity firm , for US$2.5 billion.   
 
Due to US disclosure requirements, a foreign financial institution must report its investment. But American fund firms may have affiliates in such offshore places as Cayman Islands, many of which may receive SAFE's money parked in Beijing, London, and Hong Kong and then channel the money into the US market for investment.

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