While the bulk of China’s State Administration of Foreign Exchange’s (SAFE) assets (roughly $1.8 trillion) are in U.S. Treasuries, it moved roughly 10% into riskier assets at what looks like the worst time possible: early 2007. As a result, SAFE lost $80 billion dollars, according to the FT:
“In what appears a huge misallocation of the nation’s foreign exchange wealth, Chinese holdings of US equities tripled to $100bn between mid-2007 and mid-2008, just before the economic crisis took hold and global equity markets began to tumble. The bulk of those equity investments was made by Safe, which saw foreign exchange reserves under its control grow by more than $400bn over that period.”
With losses like this, it is no wonder SAFE–and its cousin CIC–find safety in secrecy:
“Analysts and Beijing insiders say CIC has learnt from Safe that transparency and openness do not pay and the way to avoid criticism is to avoid outside scrutiny.”
It’s interesting how this view contradicts with the outward impression that the CIC is giving–of an institution moving towards greater transparency. Indeed, the CIC and SAFE are faced with a very difficult juggling act. On the one hand, they are seeking legitimacy in foreign markets. Part of achieving this is through transparency and good governance. On the other hand, as new institutions with new investment mandates, their survival necessitates the perception of legitimacy within China. This means not contradicting local expectations for SWF behavior. As per the above, one way to achieve this is by remaining secretive; thereby not raising alarms even if the behavior is contradictory to local norms.
It is revealing that Chinese politicians were left “furious” about SAFE’s recent losses:
“Wen Jiabao, premier, and a handful of other political leaders are briefed regularly on Safe’s strategy but are said to have been surprised by the size of China’s holdings of Freddie Mac and Fannie Mae bonds when those institutions failed last July.”
Is losing $80 billion dollars enough to be seen as behaving illegitimately within China? Probably not, considering the size of these funds, but it is clearly enough to raise concerns among Chinese politicians at the highest levels.
