Should SAFE be considered a SWF?

SAFE is China’s State Administration of Foreign Exchange. It enforces China’s capital controls — and manages the foreign exchange reserves of China’s central bank.

Lately though it hasn’t necessarily been investing in classic central bank reserve assets. Participating in a TPG fund is something an aggressive sovereign fund might do, but not something a traditional central bank would even consider.

SAFE clearly wants to show that with enough flexibility, it can get the same kind of returns (or better returns) than the CIC.

If I had to bet, I would guess that SAFE now manages a larger equity portfolio (counting investment in private equity firms) than all but five or so of the big sovereign funds. ADIA, KIA, Norway’s government fund all likely have a bigger equity portfolio than SAFE. Temasek and the GIC likely to so too, though I am a bit less sure on that front. Temasek and the GIC combined likely have bigger equity market exposure than SAFE, but a lot depends on just how much equity SAFE has bought since June 2007 (the last good US data point). SAFE almost certainly has more equity market exposure than the CIC.

If China’s reserves continue to increase at $75-80 billion a month, SAFE could quickly become among the biggest sovereign equity investors.

The FT’s sovereign fund (and PE) beat reporter Henny Sender was struck by how large SAFE’s investment in the TPG fund was.

China’s State Administration of Foreign Exchange has agreed to invest more than $2.5bn in the latest TPG fund, in what could be the largest commitment ever made to a private equity firm, people familiar with the matter say … Investments in private equity firms are usually not made public, but industry executives believe the largest previous investment in a private equity firm came from pension funds in the US states of Oregon and Washington. The two funds both invested about $1bn to $1.5bn in Kohlberg Kravis Roberts.

I though am struck by the fact that $2.5 billion is less than a day’s reserve growth, and thus not really all that much money for China. $75 billion — really $80 billion after valuation changes are taken into account — translates into something like $4 billion to invest every business day.

The scale of China’s April reserve growth — and indeed China’s 2008 reserve growth, once the funds China is assumed to have shifted to the CIC in q1 are taken into account — is truly astonishing. China’s $75 billion in April reserve growth easily tops the United States $61 billion April trade deficit. And $60 billion a month still strikes me as a lot.

Originally published at CFR and reproduced here with the author’s permission.

2 Responses to "Should SAFE be considered a SWF?"

  1. Rachel   June 17, 2008 at 4:13 pm

    Brad – Do you really think that SAFE’s portfolio is that high – last I recall of the US data, chinese holdings of US equities were pretty low. then again, its purchases in Aussie banks, European oil companies have all come since the data was released.Also to what extent do you think SAFE is buying directly or through closely held subsidiaries? Do you think they might give equity mandates like CIC and NSSF?

  2. bsetser   June 18, 2008 at 6:09 pm

    Rachel — My guess is that SAFE accounted for most of the $25b increase in China’s recorded us equity holdings from mid-06 to mid07. Some may have come from qualified institutional investors, but my guess is relatively little (the timing on this could be checked — we should know roughly when QDII outflows started and whether there was much demand for US as opposed to HK equities). I assume this continued over the last 12ms (more equity purchases are showing up in the tic and there is a bit of anecdotal evidence from some folks who deal with SAFE as well). and it fits with the stakes in European oil cos and Aussie banks. combine it all and tis possible that SAFE’s global equity portfolio might approach $100b (or 5% of its total). my point is that even a small share of SAFE’s assets is large relative to most other pools of sov. money.