Mo’ Reserves, Mo’ Problems

Ashby Monk

What do you do with three trillion dollars? China has been wrangling with this problem for over a year now. It seems that every time we (the news consumers) think that they (the policymakers) have finally set their long-term reserve investment strategy, nothing happens for months. But, dear reader, you’re in luck, as this is apparently one of those times that precede the months of nothingness. In other words, I have news to report.

Last week Central Bank Governor Zhou Xiaochuan said reserves had surpassed “reasonable levels” and that China needed new ways to manage and diversify its holdings. More significantly, Zhou suggested that one option on the table was to…

“…consider some new types of investment agencies which focus on new investment areas…It’s inappropriate for me to detail the next stage of the plan, but the direction is clear.”

In other words, Zhou hinted at the idea of PBOC and SAFE creating some new sovereign funds to rival the CIC. And, today, the papers are filled with reports from ‘sources close to the PBOC’ (…picturing guy on street corner next to PBOC…) that have details on these new Chinese SWFs. For example, according to Caixing Online, the new funds will have a variety of roles: one will be for intervening in FX markets, while another will invest strategically in energy and precious metals.

It’s interesting to hear all of this coming out on the same day that the FT is reporting that the CIC will receive another $100-200 billion in capital. (And, as if to pre-empt my incredulity at reading another article predicting a cash injection into the CIC, the FT made a point of saying it had three separate sources confirming this cash injection. Dear FT: I’m quite sure you do. But, at this point, I’ll have to see it to believe it. Signed, Ashby.)

Anyway, it seems clear to me from these two separate stories that much of the rhetoric in the public domain stems from ongoing turf wars within the Chinese government for who gets the reserves. So I wouldn’t give any of these pronouncements too much weight until someone actually says something officially.

Also, if you’ll permit me one more gripe on this Monday morning: Is anyone else getting tired of countries invoking the Norwegian-model in descriptions of the new fund they are considering? For example, here’s the WSJ article from this morning,

“The source said the funds would be loosely modeled on the Norwegian sovereign wealth fund commonly referred to as the Petroleum Fund.”


OK. Yes. I get it. The GPF-G / NBIM is a remarkable fund. It really is; its social and ethical foundation has been instrumental in facilitating the legitimacy of the SWF with the domestic populace. And its sophistication and performance, as well as its integration into the budget process, are definitely praise worthy.

But (!) I’m fairly certain that any fund whose strategic investment strategy focuses on “energy and precious minerals” or that intervenes directly in currency markets could not be described as “Norway-style SWF management.” The NBIM is a portfolio investor. It’s only now pushing into real estate. So if the information about these funds from the PBOC source is correct, then these new funds will be nothing like the Norwegian SWF.

Anyway, I’m not saying the Norwegians can’t offer countries quite a bit of insight on how to set up SWFs – they can and they have – I’m simply saying that not every fund in the world has to be based on Norway’s model. It seems to me that countries cite the Norwegian fund when they want to assuage the West about their intentions, noting (correctly) that many Westerners don’t seem to be concerned about the behavior of the NBIM. But, lean in so you can hear me better, the secret ingredient for why nobody thinks of the Norwegian fund as threatening is…because it’s Norwegian. That’s a tough ingredient to find in China.

3 Responses to “Mo’ Reserves, Mo’ Problems”

  1. 1 MMcC April 26, 2011 at 3:28 am

    I quite agree that, until an official announcement is made, nothing is certain. However, it seems possible to me that everyone here is telling the truth. It was always the case that more funding for CIC would require a renegotiated compromise between CIC, MoF, SAFE, and State Council. For USD200bn, a requirement that CIC invest some proportion of the new funds into offshore-listed Chinese companies and that SAFE be allowed to repackage some of its existing investment themes into mini-SWFs, seems a reasonable middle ground. I don’t think either idea is necessarily a great one but, with USD3bn needing a home, any compromise might start to look good. I’d look out for near-simultaneous announcements from CIC and SAFE in the next six weeks (i.e. after CIC’s annual report) if this deal has indeed been struck.

  2. 2 Ashby Monk April 26, 2011 at 7:19 am

    Thanks, Mike. Perhaps the announcement will come at the IFSWF meeting in Beijing in a few weeks…hosted by CIC.

  1. 1 Reducing Western Anxiety over the CIC « Oxford SWF Project Trackback on April 28, 2011 at 10:32 am

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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