Today we learn that a “Chinese entity” has purchased a roughly 1% equity stake in BP (worth US$2 billion) in BP, one of the world’s largest energy companies (concentrated in oil, of course). On one hand, this isn’t much of a surprise: last September, China launched a US$200 billion investment fund (CIC) in hope of achieving higher returns on its massive foreign currency reserves than the low-rates that it is earning on relatively safe US Treasuries and other low-risk investments.
But the thing is, CIC isn’t the Chinese government entity that purchased the BP stake.
Instead, according to the AP, Dow Jones and other reports, the purchaser of the stake is the State Administration of Foreign Exchange [SAFE] – the people in charge of those famed $1.68 trillion in foreign currency reserves. And that is big news, indeed.
Three quick observations on this odd, interesting, and unexpected new government investor.
1. CIC has been very careful to assure the international financial community that its aims are strictly commercial, and has been quite open about (at least some of) its public investments. SAFE, on the other hand, is a notoriously opaque government agency that has never offered any level of transparency about its holdings – much less, its commercial investments. SAFE is – unapologetically – a blunt tool of Chinese government policy. The fact that it has just materialized on the international equity markets is bound to unsettle some in the world of government and finance (and this blogger). Just what are its goals?
2. For better or worse, Chinese government agencies are now competing on the international equity markets. Now, I’m a big believer in free market competition, but I must admit that I am having a hard time getting my mind around the thought that two Chinese government entities, controlled at the highest levels of the Party, are now competing to invest hundreds of billion of dollar reserves. What are the political consequences?
3. If SAFE is buying equities, then China is shifting its foreign currency reserves into equities and other potentially high-yield investments at a much faster rate, and in different ways, than anybody expected when CIC was announced last September. Whoa.