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China may strip sovereign wealth fund

FREE OF RESTRICTIONSThe proposal would mean China Investment Corp, Beijing’s overseas investment arm, could start investing in US equities, bonds and property

AFP , BEIJING AND TOKYO

China is considering stripping the country’s US$300 billion sovereign wealth fund of banking stakes to help it get around some US investment restrictions, a report said yesterday.

The proposal would mean China Investment Corp (CIC, 中國投資公司) would no longer be responsible for holding the state’s majority stakes in China’s largest banks, the Financial Times reported, citing unnamed sources.

It would end CIC’s status as a bank holding company in the eyes of the US Federal Reserve and free the Chinese wealth fund of certain restrictions when making investments, the report said.

CIC is believed to be targeting equities, bonds and real estate deals in the US market, it said.

The wealth fund currently holds shares in China’s major lenders, securities firms and insurers through its domestic investment arm Central Huijin Investment Co (中央匯金), which was set up in 2003 and transferred to CIC upon its creation in 2007.

CIC was established to invest overseas some of China’s massive foreign exchange reserves — which stood at US$2.447 trillion at the end of March — partly to gain better returns.

The bank stakes were valued at about US$70 billion dollars in 2007 and the bank dividends have been a major source of CIC’s returns as most of its other investments are too young to have had significant yields, the report said.

It is unclear whether the sovereign wealth fund would be compensated for the loss of the bank holdings. The report said some ­senior policymakers were pushing for Huijin to be spun out of CIC and handed ownership of the government’s stakes in financial groups.

Meanwhile, China has more than doubled its record investment in Japanese government bonds this year, buying a net ¥541 billion (US$6.16 billion) in the first four months alone, an official said yesterday.

China had previously invested modestly in Japanese government debt, selling a net ¥80 billion of Japanese securities last year.

However, this year, net buying in the January-April period stood at ¥541 billion — more than double the ¥253.8 billion total for all of 2005, the current full-year record, a Chinese finance ministry official said.

The increase coincides with Europe’s fiscal crisis and may indicate that China is putting more of its ballooning foreign exchange reserves into relatively stable Japan government bonds (JGBs) as a result, analysts say.

China has sought to diversify its vast investments away from the US dollar since the onset of the financial crisis.

Japan’s risk of default is perceived to be much lower than debt-hit Greece or other eurozone countries, even though its gross public debt is nearing 200 percent of GDP, the highest among developed countries.

With around 95 percent held by domestic investors, Japanese bonds are seen as a relatively safe bet. As of the end of March, foreign investors owned 4.6 percent, or ¥31 trillion of outstanding JGBs.

However, the finance ministry official said: “True, domestic investors are a source of stability in JGB prices, but most of those investors are Japanese banks and if banks face troubles, the JGB market would not remain calm.”

The ministry official added that most of the Chinese investment is for short-term bonds, with ¥517.7 billion consisting of debt maturing in less than a year and ¥23.4 billion of medium to long-term securities.

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