It is best to invest foreign exchange reserves in readily cashable and liquid overseas assets, and take Chinese companies’ equity investment into account.
China’s State Administration of Foreign Exchange (SAFE) has invested more than 1.6 billion U.S. dollars in U.K. property and infrastructure since last year. Certain analysts believe now is a good time for bottom fishing in the U.K. real estate market.
Making good use of the huge foreign exchange reserves as well as preserving and increasing the value of the reserves have been a constant headache for China. There is a strange phenomenon concerning China. The prices of the bulk goods the country buys in international markets are bound to rise, but the currency China invests in is bound to depreciate. It is heartbreaking to see over 3.3 trillion U.S. dollars of foreign exchange reserves shrink in value.
The SAFE and Chinese sovereign wealth fund China Investment Corporation (CIC) have made considerable achievements in managing and investing the country’s foreign exchange reserves. However, the SAFE’s investments in U.K. property are somewhat questionable, and it is too early to say whether U.K. home prices have hit bottom.
Both investment companies and banks develop various financial tools and mainly adopt three ways to invest. These ways include buying a company’s stock or participating in mergers and acquisitions for long-term and stable returns, investing in readily cashable financial assets such as stocks, bonds, and financial derivatives in international markets, and purchasing international bulk commodities as reserves.
It is risky for the SAFE and CIC to invest in overseas property projects that have poor liquidity but involve overly high management fees and taxes.
Here are two examples. If a bank takes back asset from a company unable to repay an asset-backed loan on time, the value of the asset, which is often real estate, usually shrinks significantly.
Another well-known example is Japan. The Japanese yen appreciated and the country’s foreign exchange reserves increased sharply in the 1980s, kind of like what is happening in China now. Japan’s domestic stock and real estate bubbles peaked in 1989, and the wealth of the Japanese people increased significantly accordingly. At the time, home prices in Japan were much higher than in the United States and Europe, so Japanese spent loads of money buying real estate in the United States and other countries. Japan’s Mitsubishi Estate bought Rockefeller Center, then a complex of 14 commercial buildings, for nearly 1.4 billion U.S. dollars in 1989, and Japan’s intention of buying the United States surprised the whole world. However, Mitsubishi Estate suffered losses after buying Rockefeller Center, and sold it back to its original owner at half the purchasing price shortly afterwards. There were many similar incidents. Instead of buying the United States, Japan fell into the trap set by the United States.
It is best to invest foreign exchange reserves in readily cashable and liquid overseas assets, and take Chinese companies’ equity investment into account. For example, CIC invested in Alibaba Group to finance the Internet company’s plan to buy back part of its stake from Yahoo. By doing so, CIC not only supported a major Chinese company, but also made a good investment which would bring long-term returns.
The SAFE and CIC should try to make such investment.
Read the Chinese version at: 中国外储成功抄底英国地产言之尚早, Source: The Beijing News, Author: Yu Fenghui
