Brief Peak Inside the SAFE

What started as a small operation during the Asian Financial Crisis of 1997 now reverberates across capital markets and asset classes. The SAFE Investment Company invests money on behalf of China’s State Administration of Foreign Exchange (SAFE). China’s explosive growth over the last decade has filled the SAFE with foreign reserves, surpassing Japan’s massive pool of U.S. treasuries. As of October 2013, China’s foreign exchange reserves increased to US$ 3.66 trillion. China’s wealth is viewed by some government officials with conservatism and is described as xue han qian or “blood-sweat money” on the backs of Chinese workers.

China’s Foreign Reserves (Click to Enlarge Image) – Billions USD
Source: State Administration of Foreign Exchange

An ancient Chinese proverb, 富 不过三代 or fu bu guo san dai, essentially means, “wealth does not pass three generations.”

If one were to read more deeply into the Eastern adage, it can be interpreted like so: The first generation destroys the initial wealth; the second generation sacrifices and works hard, and the third generation learns to save – and the cycle repeats. The Chinese government went through three decades of transforming the country into a manufacturing powerhouse. In the context of the proverb, the Chinese have entered the “third generation.”

The 2007 shocks from the global financial crisis and Western banks’ massive deployment of stimulus measures have created a flood of inflationary currency in international markets. In addition, interest rates of U.S. treasuries plummeted. In 2007, officials at SAFE reacted; they moved their strategy to embark on diversifying into equities, specifically large cap stocks. They weren’t content to simply move capital into different asset classes, SAFE moved capital into different geographic markets such as Spanish bonds.

Investment managers at SAFE have held a long-term view of equity markets. Growing bold and opportunistic, SAFE’s managers predicted that the market drops of 2008 would trend upwards in the long-run. Not all market dislocations and opportunities were positive. SAFE opted to dip their toes into private equity and trust private equity firm TPG Capital to safely manage their capital. SAFE invested US$ 2.5 billion into a fund managed by TPG which invested in the now-failed Washington Mutual. Co-founded by David Bonderman, TPG later admitted their fifth fund was a mess.

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