China to Use Reserves to Finance Overseas Investment Deals

China’s foreign-exchange regulator said a new unit will use the nation’s $3.3 trillion in reserves to support Chinese companies expanding abroad, signaling fresh outlets for the world’s largest currency stockpile.

The State Administration of Foreign Exchange said today that its Co-Financing office has been seeking “innovative use” of the reserves and “supporting financial institutions in serving China’s economic growth and going-out strategy.” Separately, the head of China’s sovereign-wealth fund said it’s increasing allocations to assets including infrastructure to cut its reliance on U.S. debt.

The increased support may further boost Chinese non-financial investment overseas that rose 25 percent in the first 11 months of 2012 to $62.5 billion amid slower growth at home. The Chinese government has been encouraging companies to buy assets overseas through a “going out” strategy to secure energy and commodity resources, buy technology and build internationally competitive businesses.

“A larger portion of China’s reserves is expected to be used to finance overseas investment deals,” said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong. “Given the large size of China’s reserves, a small percentage change will mean a big amount.”

Zhang said only a small part of China’s reserves are expected to be used in the new office.

Safe Asset

Lou Jiwei, head of China Investment Corp., said at a Hong Kong forum today that while U.S. Treasuries are “still a safe asset at the moment,” with an economic recovery, “it’s only a matter of time that U.S. interest rates will rise and those bonds will depreciate in value.”

“Therefore, buying U.S. debt is a very difficult decision,” Lou said. “Not buying it reduces our portfolio’s ability to hedge against risks. If we buy it, over the long term, it’s not a good asset. So our approach is limited buying. We’re hoping to add allocations to stable-return, absolute-return, stock and other assets to reduce reliance on U.S. debt.”

CIC, which helps manage the foreign-currency reserves, will post a profit on its overseas investments for 2012 as monetary easing in Western countries boosted capital markets and investment returns, CIC’s Executive Vice President Jesse Wang said at a forum in China last month.

SAFE said its Co-Financing office will respect “market choice and willingness” and promote “fair play,” according to a statement on its website. The operations have “promoted China’s economic and social development, expanded investment scope and fields of foreign-exchange reserves and promoted a diversified management approach,” said the Beijing-based agency, which is part of the central bank.

Annual Report

SAFE’s 2011 annual report, published June 2012, listed the office in an organization chart, without giving details on its role.

Separately, SAFE’s head said the nation must seek to avoid failed overseas investments and needs more justification to use the reserves than assertions that deals boost the nation’s resources or security.

Domestic companies have asked the government for inexpensive foreign currency, “claiming their deals are buying resources for the country or improving national strategic security,” Yi Gang wrote in an article in the Jan. 14 edition of Chinese magazine Century Weekly, published by Caixin Media. “Cheap funding” only encourages blind overseas purchases and leads to investment failures, Yi said.

SAFE had already started “co-financing” operations before the unit was created, mainly with China Development Bank, Caixin reported. About two-thirds of the bank’s $250 billion in foreign-exchange loans are sourced from SAFE, Caixin said.

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