International institutional investors are following news and rumors surrounding the formation of the State Foreign Exchange Investment Company (FEIC) China's new body for managing the country's foreign exchange reserves. In the short term, the firm will have more than ＄100 billion at its disposal.
Reports were recently submitted to the FEIC's preparatory commission by two independent local firms suggesting the FEIC's makeup and investment direction. The commission is charged with finalizing the FEIC's structure and investment goals, and will likely complete its review of the reports within the week.
Because interest on government debt will be paid by the FEIC, it is limited in making investments like the ＄3 billion it poured into Blackstone. But the EO has learned that the preparatory committee has not finished discussing exactly how the FEIC will invest, and some are suggesting the company work with national strategic interests in mind.
Sources say that the two reports prepared by the firms will finish undergoing consideration this week. While the content hasn't been released publicly, it is thought to touch upon the group's structure, operations model, personnel, and incentive mechanisms.
Setting the Bar High
Members of the preparatory committee come from various interested government departments and agencies, the majority of whom won't stay on to work for the firm. Meanwhile, it has become clear that the FEIC will try to recruit experienced risk managers and investors from the international financial markets.
Industry insiders have stressed that investing in international financial markets demands extremely specialized technical knowledge and the ability to innovate in them; both of which domestic bankers still lack. They say that the FEIC must recruit globally if it invests globally, and thus must target the Wall Street elite.
As these top traders already make millions of dollars a year, attracting them will require significant compensation packages. "The FEIC can't waste money on administrative or back-office costs," says one insider.
And as for institutional investors, the FEIC will likely choose them based on criteria including the age of the firm, profits, income volatility, and scale of assets.
Where the Chips Fall
Due to China's strategic natural resource shortage, some experts believe that FEIC should snatch up these reserves—a view shared by certain government organs. But Lou Jianwei, vice-secretary-general of the State Council, has already said that in the end the body will mainly invest in financial portfolios.
Hu Zuliu, a managing director for Goldman Sachs, tells us that purchasing strategic reserves will lead to international skepticism while also increasing commodity prices. At the same time, any large-scale purchase of commodities will increase transportation and storage costs, which is counterproductive.
One senior financial expert says that those who believe that the body should invest in these reserves don't fully grasp international financial markets and don't understand Wall Street's innovative capabilities. Many top traders have begun developing commodity trading tools that greatly reduce costs when compared to direct purchasing.
Many investments like the Blackstone one, though profitable, have relatively long return cycles. If the FEIC is required to reliably pay interest on government debt each year, it must focus its investments on more guaranteed short-term returns.
Also, since the FEIC's profits will be calculated in dollars, a yuan appreciation of 5 percent in one year would necessitate a yearly return of at least 10 percent. With 200 billion dollars to invest, this will be very difficult to maintain
All of these questions may clear up quite soon-- one member of the preparatory council divulged that the FEIC could be up and running as soon as September.
Original article: [Chinese]
