Beijing's US$300b fund a wake-up call to US, Europe

by **hlk** Thu 15 Dec 2011, 08:11

BEIJING: China's plan for a new US$300 billion (RM945 billion)
sovereign wealth fund is as much a warning to Washington as it is a body
blow to Brussels.

It's the clearest sign yet of Beijing's
waning faith in bonds issued by Europe and the US. Europe's festering
debt debacle, record low yields on US Treasuries and a depreciating
dollar all add weight to the view in China that the time is ripe to
change investment tack.

"China has decided that real assets
are better than broken debt fix promises and low interest rates," says
Paul Markowski, president of MES Advisers and a long-time external
adviser to China's monetary policymakers on global financial markets.

Beijing has watched for two years as Europe's crisis has choked
growth and demand in China's biggest export market and stoked default
risks on the near US$800 billion of eurozone government bonds it is
estimated to own.

It has been a painful lesson. After all, China had actively
bought euro assets to guard its US$3.2 trillion reserve pile against
over-exposure to US dollars, which have lost about a third of their
value in the last 10 years as US Treasury yields have sunk to record
lows.

Reuters reported last week that the People's Bank of
China plans to create the new vehicle with two funds, one for Europe and
one for the US, making China in aggregate the world's biggest sovereign
wealth fund investor. The plan originated before Europe's debt crisis,
sources said.

That gels with comments from investment
sources with links to China's monetary authorities and foreign reserve
managers who detect a clear desire in Beijing to acquire real assets in
return for supplying fresh funds to bridge US deficits and recapitalise
European financial institutions and governments.

The US$300
billion figure is consistent with the sum that Markowski and others
calculate China has in excess reserves - the amount beyond what Beijing
would need to tackle a balance of payments crisis or a domestic funding
emergency.

"They want underlying assets. Equities, corporate
bonds, real estate - anything that governments want to flog," said one
source involved in foreign exchange trading for official institutions
such as central banks. Reuters