In 1979, the State Council approved the People's Bank of China's Proposal on the Reform of China's Banking System.[1]: 152 This resulted in the establishment of the State Central Administration of Foreign Exchange (SCAFE), which managed China's then-small amount of foreign reserves.[1]: 152 Although under the authority of the State Council, SCAFE was administered by the People's Bank of China.[1]: 152 After the State Council reorganization in 1983, SCAFE became a subsidiary of the People's Bank of China and became known by its current name, the State Administration of Foreign Exchange.[1]: 152 In 1988, SAFE was elevated to report directly to the State Council, but remained under People's Bank of China's management.[1]: 152
SAFE has a vice-ministry level position within the Chinese bureaucracy.[1]: 153 Historically, its lead executive has also generally held the position of vice governor of the People's Bank of China.[1]: 153
Function
SAFE is the foreign exchange management administrative body of the People's Bank of China.[1]: 5
SAFE's existence and role were initially closely guarded secrets, its subsidiaries were minor, but the funds under management have increased significantly in recent years. They were responsible for running SAFE's portfolio across the various time zones, replicating the investments of head office in Beijing.[2]
With the burgeoning of China's reserves and amidst increasing rivalry between state agencies, there are signs of growing independence of and competition between the subsidiaries.[2]
Since CIC entered global markets shortly before the 2007–2008 financial crisis, its initial performance was lackluster.[1]: 14 This in turn created a political opening for SAFE to expand the sovereign funds under its jurisdiction, which it did in 2013.[1]: 14
SAFE's sovereign funds invest part of China's foreign exchange reserves in investment vehicles including infrastructure projects, real estate, private equity, and strategic resources.[1]: 30 SAFE's sovereign funds invest in both foreign and domestic Chinese companies.[1]: 14 It has indirectly contributed to the financing of the Belt and Road Initiative,[1]: 14 including through its 65% ownership of the Silk Road Fund.[1]: 161 It contributed some of the Fund's initial capital, along with China Development Bank, CIC, and Export-Import Bank of China.[3]: 221
The magnitude of China's reserves is disclosed, but not its composition. At the end of 2006, approximately 70 percent of the reserves were in U.S. dollar assets, 20 per cent in euros and 10 per cent in other currencies, according to economist Brad Setser. Most of China's currency reserves are invested in high grade U.S.-dollar-denominated debt, such as U.S. Treasuries, though as early as 2007 it was estimated that SAFE held $100 billion worth of U.S. mortgage-backed securities, hoping to achieve higher returns than those on U.S. Treasuries.[9]
"The Hong Kong subsidiary is notably taking more risk in managing reserves," according to an informed source.[2] The Financial Times reported on 4 January 2008 that the Hong Kong branch had bought stakes of less than 1 percent in both Commonwealth Bank of Australia and Australia and New Zealand Banking Group, respectively Australia's second and third-biggest lender by assets, over the preceding two months. The ANZ purchase has been confirmed by the bank.[10] SAFE also invested in BP[11] and Total[12] in April 2008.
SAFE owns 65 percent of the Silk Road Fund.[1]: 161
As the reserves continue to grow, the central bank is aiming to boost investment returns on its foreign-exchange holdings by making somewhat riskier but higher-yielding investments. Pronouncements of Chinese officials are consequently closely scrutinised;[14] each trade is reportedly up to US$1 billion.[2] As part of diversification in 2008, SAFE acquired small stakes in dozens of companies including British companies Rio Tinto, Royal Dutch Shell, BP, Barclays, Tesco and RBS.[15]
Brad Setser, speaking in March 2009 said losses as a result of this diversification at the peak of the market "would exceed US$80 billion."[15]
Brad Setser said:"SAFE has built up one of the largest US equity portfolios of any foreign government entity investing abroad, including the major sovereign wealth funds....It appears SAFE began diversifying into equities early in 2007 and, rather than being deterred by the subprime crisis, it continued to buy."[16]
2009 investment policy
On March 23, 2009, deputy governor of China's central bank, Hu Xiaolian told reporter:"China will continue investing in U.S. government bonds while paying close attention to possible fluctuations in the value of those assets.... Investing in U.S. Treasury bonds is an important component of China's foreign currency reserve investments..."[17]
Branches
SAFE has branches and offices in all provinces, autonomous regions and municipalities. As of 2005, it had 36 branch offices, 298 central sub-branches and 508 sub-branches.
The Hong Kong office (华安公司 SAFE Investment Company Ltd) was set up just in June 1997, before the handover of Hong Kong, and served an important role in defending the value of the Renminbi and Hong Kong dollar's peg to the US dollar against international speculators. It was a minor outpost for SAFE for several years, with only about $20bn in funds under management.[2]
^McGregor, Richard; Hollinger, Peggy; Sender, Henry (2008-04-03). "China buys 1.6 per cent stake in Total". Financial Times. Beijing, China. Archived from the original on 2008-06-04. Retrieved 2009-03-25.
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