International | Mar 12 2007
By Greg Peel
It’s long been talked about and long been anticipated, but finally China has made a constructive move on the investment of its huge current account surplus. The government has announced the creation of an “investment company” that will oversee more active management of China’s US$1 trillion of foreign currency reserves.
While there was no mention of just how much money the investment company will be given to play with, nor which markets it hopes to play in, there is no doubt that the intention is for a move away from low-yielding US bonds. It is also not clear exactly when the company will begin operations.
China’s motive is to make better use of its reserves, which basically means taking more risks to earn a better return. Speculation is that the company will receive in the order of US$200-400 billion, which would suddenly make it one of the world’s richest investment funds. Mingchun Sun of Lehman Brothers Hong Kong suggests diversification could include investments in stocks, corporate bonds, and even commodities (Yahoo Finance).
China can look to Singapore as a role model. Singapore’s US$90 billion Temasek Holdings owns stakes in Singapore Airlines, Singapore Telecom, banks, real estate, shipping, energy, and has investments in industries in India, China, Korea and elsewhere. Temasek has achieved an 18% average annual return since its inception in 1974.
By contrast, China made a mere 3% on its foreign investments last year.
Just what impact might this have on the US Treasury market? The US relies on foreign investment in its paper in order to finance its massive deficits.
The US is putting on a brave face, and indications are that there is not too much to be overly concerned about anyway. Firstly, as China’s foreign reserves are growing by some US$20 billion each month, China could afford to invest money in other markets while maintaining its current rate of investment in US bonds. Moreover, US Treasury secretary Henry Paulson notes that China’s entire holdings of US Treasuries still only represents one day’s trading on global bond markets.
Speculation from within China is that the new investment company may not be your typical investment fund either. There is talk of putting money towards the strategic stockpiling of oil and other commodities, as well as spending on social programs encouraging domestic consumption. China is, after all, a Communist country, albeit a mere shadow of its former red self.
