China ’s central bank governor has shed new light on the possible structure of its newly announced agency for managing the country’s vast foreign exchange reserves.
In an exclusive interview with Emerging Markets, Zhou Xiaochuan said that the new agency could incorporate structural elements from Singapore’s Temasek Holdings and Government Investment Corporation, the Korean Investment Corporation, Norway’s central bank, the Kuwait Investment Authority and the Saudi Arabian Monetary Authority, among other state investment agencies.
China will take its cue from a range of central banks with large foreign exchange reserve holdings as well considerable experience in active reserve management.
The governor said Chinese finance officials are actively “collecting materials” from foreign central banks. “I sent out a team to collect information [from central banks]” in order to “combine international experience to apply to our domestic market.”
Zhou noted that ideas for how the agency will manage the reserves are not yet “very clear”, leaving open the possibility that Chinese authorities will also seek asset management expertise from foreign firms.
Zhou would not say how much money will be allocated to the “experimental” agency but noted that the government will “cut a small piece of our reserves for the new management agency”. Officials and local press reports have suggested an amount of up to $300 billion.
The government is under pressure over the management of the reserves, which reached $1.066 trillion at the end of last year and are rising by about $20 billion a month, mainly driven by China ’s swelling trade surplus.
Zhou said that the new agency – to be established by the central bank and the finance ministry – will start operating this year, and shift the focus away from building a financial cushion and focus more on the “profitability side”. The new agency will also seek to mop up excess liquidity.
Jerome Booth, head of research at Ashmore, commented: “The idea of setting up a separate fund is not unusual and will not change how the money is managed. The interesting thing is that the central banks are all talking to each other [about this],” added Booth, whose firm is said to have sought investment mandates from the Chinese central bank.
Zhou stressed that China will also end its practice of stockpiling foreign exchange reserves. “We do not intend to go further and accumulate reserves,” he said. “Many people say that foreign exchange reserves in China are [already] large enough.”
Although the reserves are held as assets on the central bank’s balance sheet, many senior officials have been eyeing the funds to make strategic investments in resources, like oil, offshore, or to spend on social programmes at home.
Three quarters of the reserves will continue to be managed by the current custodian, the State Administration of Foreign Exchange (SAFE), a division of the central bank. The make-up of SAFE’s investment portfolio is secret, but its mandates for foreign banks to invest on its behalf have generally been conservative, focusing on Treasury bills and mortgage-backed securities.
Brazil , with its abundant energy and mineral resources, has been trying to attract some of the Chinese reserves that will be channelled through the new agency. Its central bank governor, Henrique Meirelles, told Emerging Markets: “ Brazil does not have a specific strategy to attract investment from this Chinese investment agency. What needs to be done is for Brazil to offer adequate conditions to provide security and return for investors.”