Posted on 03/10/2007 12:20:26 AM PST by TigerLikesRooster
China forming company to invest huge reserves
(agencies)
Updated: 2007-03-10 10:12
Beijing is to create one of the world's biggest investing companies, with possible ramifications for global stock, bond and commodities markets, and might also affect how the US finances its huge budget deficits.
Chinese Finance Minister Jin Renqing said on Friday in Beijing on the sidelines of the ongoing National People's Congress session, that Beijing is trying to make more profitable use of its $1 trillion in foreign currency reserves. It is believed that most of the reserves are now parked in safe, but relatively low-yielding US Treasury securities and other dollar-denominated assets.
Chinese Finance Minister Jin Renqing gestures at a news conference during the annual session of the National People's Congress in Beijing March 9, 2007. [Reuters]
"We can achieve more profit from (wiser) investments (of the reserves)," Jin said at a news conference. "We are now in the stage of forming this new company."
The finance minister said China may follow the lead of Singapore's Temasek Holdings, which manages nearly $90 billion in government pension funds and other assets. It owns stakes in Singapore Airlines and Singapore Telecom, as well as in banks, real estate, shipping, energy and other industries in India, China, South Korea and elsewhere.
Analysts have speculated for some time that China would create an investment company, and officials have said repeatedly they want to make better use of the world's largest standing foreign currency reserves. Economists have suggested Beijing might allocate as much as $200-$400 billion to the new company, which could create one of the world's richest investment funds.
"They want to be more aggressive than what they do with current reserves," said economist Mingchun Sun at Lehman Brothers in Hong Kong.
"They could invest in higher-yield products - stocks, corporate bonds, maybe even commodities," Sun said. "Basically, the returns would be higher because the risk is higher."
A shift in China's investment strategy could change its purchases of foreign government debts, affecting a market that Washington relies on to help finance multibillion-dollar budget deficits, and might eventually push up US interest rates. But Lehman Brothers' Sun played down that risk. He said that with its reserves growing by as much as $20 billion a month, Beijing could afford to keep buying US government bonds while also channeling billions into new investments.
Even so, news of the Chinese announcement - along with an upbeat US jobs report, which reduced expectations the US Federal Reserve will cut its interest rates - came on the same day of a big drop in the price of the benchmark 10-year Treasury note on Friday. That pushed up its yield to 4.58 percent from 4.51 percent.
Jin gave no details of how the Cabinet-level company might invest the reserves, nor did he say what portion of the reserves might be channeled to the company or when it would start to operate. Spokespeople for Jin's ministry and China's central bank declined to give any other details.
US Treasury Secretary Henry Paulson, in an interview this week on the US television network ABC, rejected suggestions that changes in Chinese bond purchases could affect the United States economy. Paulson said Beijing's entire holdings of US Treasuries represent the equivalent of less than a single day's trading in Treasuries on global bond markets.
Chinese economists and media reports have suggested China might adopt more unusual investment approaches, ranging from stockpiling oil and other raw materials to spending more on social programs in order to encourage Chinese consumers to spend more domestically and reduce its dependence on exports.
The growth in China's reserves is driven by the rapid growth of its exports, which brings in dollars, euros and other foreign currencies, and by the billions of overseas investment dollars being poured into the country. The surge in money flooding in from abroad forces the central bank to drain billions of dollars from the economy every month by selling bonds in order to reduce inflationary pressures.
The precise composition of China's foreign currency reserves is a secret. But economists believe that as much as 75 percent is believed to be in US dollar-denominated instruments, mostly Treasuries, with the rest in euros and a small amount in yen.
Stephen Green, chief economist at Standard Chartered Bank in Shanghai, calculated that last year the central bank made a $29 billion profit on its Treasury holdings after paying interest on its own bonds and other expenses.
But even that represents a return of less than 3 percent on the $1 trillion in holdings. By contrast, Singapore's Temasek says it has averaged an 18 percent annual return since it was created in 1974.
Ping!
The Chinese are dumping dollars for Euros. The Russians (and their former Soviet allies) only conduct foreign transactions in Euros, and trade in them, not Dollars. And, furthermore, OPEC is considering accepting only Euros for transactions throughout the cartel. So, this is economic warfare.
If they want to risk in higher yield, they risk also losing it all as well
Of course, if we are talking hedge fund-type zaiteku, then this could be very interesting behavior on China's part. ;-)
And the Euro is backed up by what government and constitution? Europeans aren't even sure of the Euro. Good luck with the ponzi scheme China.
Meanwhile the dollar is based on the USA. Hell, we even have a real government and everything.
Is this what make Bush administration wobbly these days?
I think the notion that somehow them not buying treasuries is going to sink us is a load of horse ####.
US Treasury Secretary Henry Paulson, in an interview this week on the US television network ABC, rejected suggestions that changes in Chinese bond purchases could affect the United States economy. Paulson said Beijing's entire holdings of US Treasuries represent the equivalent of less than a single day's trading in Treasuries on global bond markets.
Paulson has it right.
The real question is what China plans to do with the money. Right now, no one knows. As far as managing a trillion dollar fund, there are a lot of things that can happen. I don't see them investing a lot in US equities though, nor European.
I could see them definately funding numerous private equity funds specific to the international energy sector. If you want I can explain how this works and what China will probably be doing in this regard.
I also see them sending a large chunk to neighboring countries, namely Korea, Japan, Taiwan, Singapore, Philippines, etc.
This money in that regard will be a tool to offset US influence in what China sees as their sphere of influence.
In other words, after all this money is redeployed, if say for example a conflict arises, China will have skin in the game that they can use for influence.
They will use this as their both soft and hard power against US interests in East Asia.
A heavy chunk will probably go to Taiwan too. Since they are buying people off, might as well buy Taiwan too.
Personally I think its going to be used to hedge against US influence, particularly economic influence in East and SE Asia.
The Chinese are going to be coming on strong to drive the US back and out of East and SE Asia.
They will probably invest in strategic parts of the Aussie economy too.
This money can weild lots of political influence.
A Trillion dollars goes a long way every where, except in the US. Like I said, Paulson is right. They have minimal influence over us. That is not to say that this money thrown around and redeployed to their neighbors won't result in a strong political impact in the region and against the US.
China is going to be buying sway.
As for the energy piece that I mentioned before, they will probably be funding off shore private equity funds to operate in Africa and to weild influence in the Middle East, South America, and a few other places.
Bingo! We have a winner!
I got a laugh recently when I read that when the Chinese are not using "The Great Hall of the People" for Congresses, they rent it out. Recently a group of Kentucky Fried Chicken franchisees convened there. Something like Taco Bell renting the House of Representatives.
When the Chinese get rid of the majority of their dollars it will be time for them to go for Taiwan. They know that if we went to war with them, we would just cancel all of their securities. This is a precursor to war.
I wouldn't think so. From what it appears to me, the Federal Reserve has already started monetizing the debt --- I was surprised to see that they are carrying something over $700 billion in U.S. government debt themselves.
Frankly, if the U.S. does that, I don't see why we don't just let the Treasury print U.S. dollars than borrow Federal Reserve notes.
The idea of our government borrowing dollars rather than just creating them was to induce some fiscal discipline, but since it appears that the central banks have decided not to enforce that discipline. So why bother to borrow dollars at 5% interest rather than just have the Treasury issue them for free?
Of course, we would want to raise the current issue limit from $300 million to something more reasonable.
The key difference is that when the Japanese owned Rockefeller Center, when their investment went south, the building didn't just disappear. When your dealing in equities, you're dealing with "paper wealth," that that paper CAN disappear.
And to be honest with you, I can see George Soros working with the Chi-Coms on this, and actively trying to attack the US economy, while destabilizing the dollar. It's something that he's done before, and neither he, nor the Chi-Coms, have any love for this country.
Mark
I agree. If the US announced a 10 percent sequestration (don't pay back until they have human rights) on the value of Chinese owned paper..... it could be an interesting tax on tyranny.
The money will flow to SE Asia and East Asia primarily.
China will try to give the US a run for its money in the region. The US better gear up for the game.
The Chinese are looking to strike east and south, and the Russians are looking to strike west and north.
Isn't it true that the U.S. economy is $13 trillion?
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