The formal launch of China's investment agency may prove to be a milestone in the development of sovereign wealth funds but for now it is largely irrelevant to the conduct of the country's economic and monetary policy.
Besides giving Beijing a way to earn more on part of its $1.4 trillion in reserves, the agency was billed as a way of siphoning off some of the inflows from China's record trade surpluses that are boosting money supply and pumping up asset prices.
But as the China Investment Corp (CIC) prepares to open for business on Saturday, economists say the fund's initial remit is such that it will not make much of a difference to policy makers at the People's Bank of China, the central bank.
Critically, new net currency inflows will be bought not by the CIC, as was once assumed, but by the central bank.
As it issues yuan in exchange, the central bank will keep creating high-powered reserve money -- the building blocks for bank credit and money growth -- that it will have to keep mopping up through open market operations.
"This means that the scope of the current monetary policy implementation, as well as the complications, including forex reserve accumulation and sterilization, would remain largely unchanged with the establishment and operation of the CIC," economists at JPMorgan Chase said in a note to clients.The sums of Chinese money chasing a home overseas are also likely to be underwhelming.
Although the CIC has initial capital of $200 billion, one-third of that will pay for Central Huijin, an investment vehicle that the PBOC used to pump foreign exchange into several big state banks.
Media reports have also said the CIC will be used to recapitalize two other banks and perhaps even to buy shares in big state-owned enterprises.
"The external implications are that the impact of the CIC, on the U.S. dollar and U.S. treasuries, at this phase may not be as negative as some market participants may have feared," JPMorgan Chase said.
Recent market turmoil and domestic criticism of the CIC for its purchase of a $3 billion stake in Blackstone mean the fund is likely to start off investing fairly conservatively in liquid foreign securities, said Michal Pettis, a professor at Peking University.
Shares in Blackstone have fallen 20 percent since the U.S. private equity group's initial public offering in June, handing the CIC a big paper loss.
"As the CIC grows, I would bet that an increasing amount of its assets is likely to be invested in strategic investments, which I suspect will include the financing of the foreign expansion of state-owned companies."This may turn out to be the most highly politicized aspect of the CIC's future business," Pettis said.
♠ Posted by Emmanuel in China at 9/28/2007 02:31:00 PMTexans use the term "all hat, no cattle" to describe all hype, no action. In computerese, it's called "vaporware." Much discussion has centered on the possibility that the Chinese government would use its whopping $1.4 trillion in reserves to buy up the West and the rest of the world through its newly created sovereign wealth fund, the China Investment Company (CIC). As the CIC opens its doors this Saturday, Reuters' Alan Wheatley urges us not to believe the hype--for now at least. Among other things, the CIC is likely to be under the thumb of the People's Bank of China (PBoC). Lest we forget, there are also those past bugaboos of el crappo Western investments like Flint--I mean, Blackstone stock and rising Western protectionism for CIC to deal with: