China built enormous stake in US equities just before crash

China built enormous stake in US equities just before crash
The Chinese government more than tripled its investments in the US stock market to $99.5bn (£70 bn) just months before the financial crisis, it has emerged.

By Malcolm Moore in Shanghai
Last Updated: 3:06PM GMT 02 Mar 2009

The People's Bank of China in Beijing. The shift into riskier investments was the result of a power-struggle between the central bank and the Ministry of Finance.

Provisional figures from the US Treasury department showed that Beijing was holding $99.5bn of shares in June 2008, up from $29bn in 2007. Two years ago, China only held $4bn in US equities, preferring to concentrate on Treasury bills.

However, economists said the latest figures suggested that China may have bought as much as $150bn of equities worldwide, or 7pc of its vast foreign exchange reserves.

Brad Setser, an economist with the Council on Foreign Relations, a US think tank, said the State Administration of Foreign Exchange (SAFE), a branch of the Chinese central bank charged with looking after the foreign reserves, was responsible for the buying spree.

Last year, a Sunday Telegraph investigation revealed that SAFE had built holdings of £9bn in companies listed in London. The new figures suggest that SAFE has now become one of the largest sovereign wealth funds in the world, although it is likely to have been badly burned by falling markets during the financial crisis.

The shift into riskier investments was the result of a power-struggle between China’s central bank and the Ministry of Finance, both of which wanted to show they were capable of managing China’s huge wealth.

The Ministry of Finance runs the $200bn China Investment Corporation (CIC), the country’s official sovereign wealth fund, but has been heavily criticised for taking loss-making stakes in Blackstone and Morgan Stanley.

Mr Setser estimates that only $8bn of the $99.5bn of US equities were bought by CIC, with the rest being purchased by SAFE. “SAFE wanted to show that it could manage a portfolio of 'risk’ assets,” he said, in order to make sure that more of its funds were not passed over to CIC.

However, an official from the China Banking Regulatory Committee said that SAFE had little idea of how to make overseas investments, and lacks a proper team of analysts and stock-pickers.

The head of SAFE, Hu Xiaolian, is one of the few women at the top of a major Chinese government department. However, she has little commercial experience, having spent her entire career at the central bank and graduated from the bank’s own university.

Nevertheless, Arthur Kroeber, an economist at Dragonomics in Beijing, said China is likely to continue buying equities despite the slumping markets.

“They would have seen a considerable erosion in value by now, but I think they are absolutely playing a long game. Fundamentally, what choice do they have? What short game is there that is making money these days?” he said.

“SAFE is saying: the market may be problematic, but if we buy now for the long-term, we’ll probably finish up.” He added that the Chinese public was relatively content with the management of the country’s wealth, since SAFE does not disclose any information about its buying activities.

“As long as they don’t build a big stake in a high-profile company that blows up, they will be ok,” he said, adding that he thought it was possible for the central bank to put as much as 10pc of its foreign reserve holdings into equities. “I would be surprised, however, if they were authorised to put more than 10pc into shares,” he said.


http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4927567/China-built-enormous-stake-in-US-equities-just-before-crash.html