BEIJING has quietly established a new state-backed wealth fund out of its $US3.2 trillion foreign reserves to help Chinese companies invest overseas, a move that is likely to see billions of dollars flow into Australia.
State Administration of Foreign Exchange, the government body responsible for managing China's vast foreign reserves, said on Monday it had set up a new investment body named SAFE Co-Financing. It will seek alternative investment channels for China's cash piles.
The new financing vehicle is part of Beijing's broader strategy of diversifying its large foreign exchange holdings, which, until now, have been largely invested in low-yield US Treasury bonds.
In a statement released 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 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 Chinese foreign investment. Its investments range from stakes in listed companies to infrastructure.
The establishment of SAFE Co-Financing was hinted by the outgoing governor of China's Central Bank, Zhou Xiaochuan, more than 18 months ago when he said not all eggs should be put in 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 Limited, to invest part 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 Corporation has a $500 million managed resources fund.
The new SAFE Co-Financing will largely dispense its money through Chinese financial institutions instead of foreign fund managers to support companies investing overseas, according to Caixin.
China Development Bank, a large lender to Australian resources projects with Chinese interest, is expected to be a beneficiary of the new investment vehicle. It is estimated that SAFE has provided more than two-thirds of $250 billion of its funding.
SAFE has made it clear that it would invest only in safe projects, which will preserve the value of its foreign reserve investment.
The deputy governor of the Chinese central bank and the head of SAFE, Yi Gang, warned that Chinese companies investing abroad must be subject to the rigour of cost and said highly leveraged projects could spell disaster in the future, according to 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