China hasn’t lost its voracious appetite for resources. In fact, it seems to be increasingly using its foreign exchange reserves to make resource investments in order to meet the country’s strategic needs. However, beyond the recent SWF investments, it looks like SAFE and the State Council have been getting pretty creative in their rush to secure resources.
Indeed, a report out over the weekend in New Century magazine (and reprinted here) indicates that China has been considering a new policy of loaning out its foreign exchange reserves to resource rich countries in exchange for crude oil imports:
“…the idea originated in late-2009 after China signed a deal with Russia under which China would lend $25 billion to Russia in return for 15 million tonnes of crude oil imports…The State Administration of Foreign Exchange has been assigned by the State Council to lead the study into the lending project and SAFE has hired China Development Bank to arrange the loan.”
This is pretty interesting. We don’t have much in the way of details, but we can make some guesses.
First, this seems to imply that China is outsourcing “reserve hoarding” to other countries for a fee. In other words, you come to China, pay a fee, and you’ve got a ready-made SWF (…or at least you have the capital to start one…).
Second, this type of “forex loan” kind of reminds me of “securities lending” within other large institutional investors (such as pension funds). This is where the fund makes short- to medium-term loans of their securities to other investors — who typically want the security to short it — in order to generate incremental revenues from their portfolios. Typically, there is a fee quoted as a percentage of the value of the loaned securities. However, in the Chinese case, the securities lending agreement appears to be priced in barrels of crude instead of cash.
I would love to see more details on this! Very interesting developments…