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China to Kick Off $300 Billion Investment Vehicle for FX

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China is on the verge of launching a new $300 billion investment vehicle that would boost returns on foreign exchange reserves by setting up funds targeting two separate regions—the U.S. and Europe.

The vehicle had been planned prior to the onset of the European debt crisis, and was designed to boost returns on China’s foreign exchange reserves by making more aggressive overseas investments, Reuters reported. The vehicle, according to two sources who declined to be named, is to operate two funds, one focused on U.S. investments and the other on European investments.

The new vehicle, details of which are still under discussion, would be affiliated with China’s State Administration of Foreign Exchange (SAFE). That is the portion of the central bank that is responsible for the daily management of China’s $3.2 trillion in foreign exchange reserves.

The U.S.-focused fund would be named Hua Mei, or China-US, and the Europe-focused fund is named Hua Ou, or China-Europe. Fund styles will be similar to that of the low-key Hong Kong-based Hua An, which in English is known as SAFE Investment Company Ltd., said the source, and through which SAFE has purchased stocks in dozens of overseas-listed companies.

Beijing has indicated recently that it intends to invest in the real economies of Europe and the U.S. aside from bond investments. The new venture will likely be Shanghai-based, according to the source, who said, “The company will issue yuan bonds. Then it can use the yuan to buy foreign currency from the central bank or even commercial banks for overseas investment.”

The new vehicle is expected to have an arrangement similar to that of the China Investment Corp (CIC), the country’s sovereign wealth fund. When CIC was created in 2007, China’s Ministry of Finance issued 1.55 trillion yuan in special yuan bonds to swap yuan for $200 billion worth of foreign currency from SAFE as the initial batch of funds for CIC to manage.


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