China builds new wealth fund

BEIJING has quietly established a new state-backed wealth fund from its $US3.2 trillion ($3.03 trillion) foreign reserves to help Chinese companies invest overseas, and the move is likely to cause billions of dollars to flow into Australia.

The State Administration of Foreign Exchange (SAFE), the government body responsible for managing China's vast foreign reserves, said on Monday it had established a new investment body, SAFE Co-Financing, and would seek alternative investment channels for China's cash pile.

The establishment of the fund is part of Beijing's broader strategy of diversifying its large foreign exchange holdings, which have been largely invested in low-yield US Treasury bonds.

On Monday, the administration said it would manage the reserve more "innovatively" and use it to "support financial institutions lending to the real economy and [the] national policy of going abroad [supporting companies investing overseas]".

The move is aimed at providing a "better financing environment for Chinese financial institutions and other participants in the foreign exchange markets [companies trading and investing overseas] through supplying funds to the market."

Given China's demand for resources, Australia has been a primary beneficiary of Beijing's diversification push and it has ranked as one of the top destinations for foreign investment. China's investments here range from stakes in listed companies to infrastructure.

The establishment of SAFE Co-Financing was hinted at by the outgoing governor of the Chinese central bank, Zhou Xiaochuan, more than 18 months ago, when he said not all eggs should be put in the one basket, according to Caixin Media, a Chinese financial publication.

In the past, Beijing created several sovereign wealth funds - including China Investment Corporation and SAFE Investment Company Ltd - to invest some of its foreign reserves on international markets.

These sovereign wealth funds have largely "farmed out" the management of their cash to foreign investment banks, fund managers and private equity firms, including Australian institutions. China Investment Corp has a $500 million Australian-managed resources fund.

However, SAFE Co-Financing will largely dispense its money through Chinese financial institutions to support companies investing overseas, according to Caixin.

The China Development Bank, a large lender to Australian resources projects with Chinese interests, is expected to be a beneficiary of the new investment vehicle. It is estimated SAFE has provided more than two-thirds of the China Development Bank's $250 billion in funding.

However, the Chinese authorities made it clear the fund would only invest in safe projects, which will preserve the value of its capital.

The deputy governor of the Chinese central bank and the head of SAFE, Yi Gan, warned Chinese companies investing abroad must be subject to the rigour of strict cost assessment, and added highly leveraged projects could spell disaster, in an article he wrote for a financial publication.

CHINA’S WEALTH FUNDS

SAFE INVESTMENT COMPANY

Total Assets: $US3.2 trillion

Investments: Mostly US Treasuries, foreign direct investment and shares.

CHINA INVESTMENT CORP

Total Assets: $US410 billion

Investments: Equities, bonds, real estate, commodities and infrastructure