China’s State Administration of Foreign Exchange (SAFE) is responsible for investing $3.31 trillion worth of foreign-exchange reserves. According to an article by the WSJ, SAFE is showing a new willingness to take significant direct ownership stakes. In the past, the foreign-exchange reserves have relied on ultralow-yield assets such as U.S. government bonds. So why is China investing in the U.K.?
SAFE is seeking investments in alternative asset classes such as private equity, listed stocks, and real estate to diversify and increase returns. Investing in the U.K. presents a great opportunity for China beyond its traditional strategy of investing in low-risk government bonds.
U.K.-registered Gingko Tree Investment Ltd., a wholly owned unit of China’s SAFE, has invested more than $1.6 billion in at least four deals since May 2012. Water utility, student housing, and office buildings in London and Manchester are among these deals. Gingko Tree bought a 40% stake in a major provider of university accommodations in Britain and 49% stake in Manchester office building One Angel Square for about $110 million since December.
But SAFE’s new plan allocates approximately 5% of its reserves in alternative asset classes; Government bonds, cash, and other liquid assets account for the majority of its reserves. Is this a positive step forward for China? Should they be investing more in alternative asset classes?
This is one more example of a world-wide push for greater yields, obtained by taking on greater risk. Will the RMB appreciate further in real terms? That strikes me as a near-certainty. That makes Chinese FDI risky.