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.
Recent evidence suggests that might be a dubious assertion. ;)
Here is how I envision that part going down...
The Chinese put up $100 billion and Japan puts up $100 billion and Korea puts up whatever billions they can muster...
As a pan Asia congolomerate they will be tasked with meeting mutually beneficial goals. Japan has an energy bottle neck as does China. Its called the Straits of Malacca.
These groups can get together on the side of whatever they are doing now and can muscle their way in.
If not that, they can just do it on their own with a $100 billion private equity energy fund.
I see it differently. Why invest money in currency that is declining in value?
All of it is a red herring and not worth the time to debate it. People are wasting their time with that talk. "OH my! OH MY! They are going to stop buying treasuries! We're all doomed! Run for the hills!" Total BS.
The real issue is the regional economic impact in Asia and how this fund deploys this money. Over time it can be an issue.
Also the energy sector should be on the lookout as well. How the money is deployed there is another thing to watch. keep in mind though the US isn't likely to be displaced anytime soon. Exxon had a $40 billion dollar profit alone last year. None the less, its something to watch.
Like I said, its all about influence.
The great risk is that the money will be invested corruptly.
If they check out of the game completely the US can recover in that front within a very short period of time.
Things like the tax code in the US and its nexus to prices of municiple bonds....
And the Fed interest rates itself...how it nexuses bond markets and even bank rates on CDs... both of those alone have way WAY more market impact on the interest the government pays out than China does.
China doesn't control jack.
They hold 15% of total FOREIGN holdings.
The government in its reporting segregates out what portions of the US debt are held by foreign governments.
Approximately 25% of our total us debt is held by those classified as 'foreign'. They own 15% of that 25% sub classification.
The US has about $8.87 trillion out.
Only 25% of that counts as foreign owned.
Your number is a sub segment of the bigger picture, not the bigger picture itself.
Ok, closer to 4%.
It's risky. If this is a time of economic downturn it's a really bad time for massive state investment in potentially high return enterprises.
They have been waffling in between 3-4% for years. Sometimes up, sometimes down. At this moment in time, its around 3.9%.
Until this new Chinese invetment house starts seriously putting the squeeze on New York and London's finance sectors, the US won't do anything to properly address the balance of trade and capital flows.
Yes, if by economy you mean GDP.
What I was referring to was equity ownership in capital markets. For instance, the New York Stock Exchange represented $26.5 trillion in total market capitalization as of December 31st, 2006; if China were to sink its whole $1 trillion into that, it would be buying almost 4% of our most important market.
That's a remarkable number: in contrast, Merrill Lynch, our biggest securities company, only has $1.6 trillion in assets under management.
A trillion dollars going into equities (or even commodities as one article has suggested) is a lot of money. Seeking higher returns on such a pile of money is going to make waves if it goes into either equities or commodities. If the Chinese really go out on a limb and dump it into derivatives and other more exotic forms of speculation, well, it could be quite interesting.
I read your analysis above and concur completely.
The Chinese sometimes remind me of a fellow sitting at the table in a high stakes poker game holding a pair of duces and thinking they are going to win the hand.
In that case, it is more likely, as you argued, that they will use the money as a political leverage, just as Russia is using their energy supply.
I am sure they want to make money in the process as well. However, their deployment of money would significantly factor in political consideration. That would be an interesting development.
With the rise of Islam, the EU maybe a bad investment.
How good will the Euro be with London, Madrid and Paris in flames?
A lot of people have that impression. Its created by media types who want to cause a ruckus over next to nothing.
Its their pro China lobbying method, IE 'we NEED China'...
As usual they overstate the performance and importance of China. Over dramatic bunch of cheerleaders they are.
See the link in post #29.
Backed by the full faith and credit of America's future generations to pay the interest tab.
Plus, if I am not mistaken they don't hold "bonds" (long term), but rather "bills" (short term)(6 months or less)....
I would have to look it up, but I am quite certain that the lion's share of what they have, probably 80-90% or more is in "bills".
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