China’s State Administration of Foreign Exchange (SAFE) has traditionally lived up to its name when managing its $2 trillion portfolio of foreign reserves.
Now the department has hired a whizz from U.S. bond investor Pimco to be its investment head.
This may mark a departure from an investment approach heavily focused on U.S. Treasuries. If SAFE moves into riskier investments such as corporate bonds and derivatives — even only in small amounts — it could have a big impact on the global market.
SAFE’s investments are a state secret, but given its approach of focusing on high-grade sovereign bonds it seems likely that returns have been thin.
But SAFE faces increasing competitive pressure at home to generate higher returns.
The high-profile $300 billion China Investment Corp. (CIC), which was set up in 2007 to invest in strategic and less liquid assets such as resources companies, also has a large fixed income trading department.
CIC has hired dozens of skilled Chinese from overseas to beef up its pool of investing talent.
In the past, SAFE has experimented with outsourcing some of its riskier investments to Wall Street banks and Western private equity firms, but the strategy has backfired. SAFE has reportedly suffered heavy losses through its investment in a Texas Pacific Group fund that was heavily exposed to financial services.
This year SAFE has embarked on an overseas hiring binge, organising recruiting seminars in London, New York and Hong Kong and promising market-competitive salaries.
Changhong Zhu, who previously managed the absolute return strategy fund at Pimco, is SAFE’s most high-profile hire to date.
If SAFE gets bolder, global investment funds may get a run for their money. Pimco has made good returns this year by buying debt of emerging market and commodity-producing countries.
Zhu may replicate this strategy at SAFE, though given the fund’s sheer size and close oversight by the authorities, any diversification away from U.S. Treasuries is likely to be gradual.
If SAFE develops an appetite for riskier assets, this could boost demand and liquidity in the global credit markets. The Government of Singapore Investment Corp. (GIC) is already one of the world’s largest buyers of corporate bonds. SAFE’s new hire is the latest sign that China is becoming bolder.
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