SAFE gets into foreign investments

From the FT:

Chinese funds jostle to invest abroad
By Henny Sender in Hong Kong and Richard McGregor in Beijing

Published: April 4 2008 23:28 | Last updated: April 4 2008 23:28

Since its formation last September, China’s sovereign wealth fund, China Investment Corp (CIC), has been beset by suspicion and criticism abroad, and recriminations from officials and the public at home, over its investment decisions.



Suddenly, as it battles to establish itself as a credible global investor, CIC has found itself running into another, unforeseen, obstacle – a second Chinese state investment agency with even deeper pockets.



The State Administration of Foreign Exchange (SAFE) is both competing with CIC for investments and complicating the sovereign fund’s attempts to defuse criticism of the way it operates and makes investment decisions.



SAFE, which is under the central bank, has long conservatively managed China’s rapidly swelling foreign reserves, which stood at about $1,650bn (€1,050bn, £828bn) at the end of February.



For a long time, that meant investing largely in US Treasuries. Even now, about 70 per cent of its assets are in dollar bonds, say bankers.



But in recent months, SAFE has emerged as a powerful and more aggressive investor, chasing the kind of returns offshore that CIC was mandated to go after.



SAFE has built up a 1.6 per cent stake in the French oil firm, Total, worth about €1.8bn ($2.8bn, £1.4bn), the Financial Times revealed this week. It has bought stakes in Australian banks and considered investing in private equity funds.



Bankers familiar with its operations believe that it is also considering investing in international real estate.



The decision to make such investments is partly linked to concern over the declining value of the dollar, which reduces the domestic purchasing power of its Treasury holdings.



But increasingly, it raises the possibility of head-on competition between the two pools of sovereign funds, only one of which – CIC’s – is under any pressure to disclose its dealings.



SAFE has potentially far deeper pockets than CIC, which has only about $70bn to $80bn to invest directly at the moment. Moreover, the head of SAFE sits on the CIC board, with access to sensitive information about its planned investments.



For example, when the private equity firm TPG was marketing a multi-billion-dollar fund to invest in troubled US financial institutions, it first approached CIC. But CIC baulked at the terms and it decided to partner with JC Flowers instead, ultimately putting about $4bn into a fund developed by the financial investor. TPG then courted SAFE.



CIC has sought to tackle its critics head-on, conducting its business in a frank and straightforward manner. Lou Jiwei, its head, has toured global investment capitals to make his case.



By contrast, SAFE has a reputation for secrecy, whether its investments originate out of a Hong Kong subsidiary or a newly established office for alternative investments out of Beijing. Its secrecy complicates life for CIC, which is trying to be more transparent in response to concerns from governments that are suspicious of sovereign funds.



The sparring between the two comes at a time when many governments are debating whether it makes sense to have rival domestic investment bodies – a model that Dubai and Singapore have adopted – to spur better performance and impose more checks and balances.



The alternative is to have a single agency, as is the case with the Kuwait Investment Authority, currently a role model for best practice among sovereign funds.



Part of the jockeying between the two Chinese pools of money reflects institutional rivalry. SAFE is controlled by the People’s Bank of China, while the CIC has ministry status and is closer to the finance ministry.