Coming to America: Safe expands its horizons

Hong Kong, Singapore, London, and now New York. The world’s biggest currency reserves manager has reportedly opened its first US office: Wall Street executives will be rubbing their hands in anticipation.

But China’s $3.4 trillion State Administration of Foreign Exchange (Safe) – or more specifically its $500 billion investment arm – may be as focused on gathering knowledge as it is on awarding mandates.

Safe reportedly now has 12 staff on Fifth Avenue, most of whom are likely to be analysts and research staff there to meet fund managers and bankers and collect data to feed back to headquarters.

“Very few overseas offices like this one have stand-alone investment teams that make decisions on the spot,” says a senior fund executive in Hong Kong.

These will be “plum posts”, taken by senior staff or rising stars being rotated for overseas experience, he adds. Most will therefore probably have come from head office, with a few hired locally for technology transfer and information sharing.

“Every investment bank will make a beeline for their new offices, and [the Safe executives] get educated,” notes the executive. “It’s a wonderful training ground.”

The biggest surprise for many market participants is that Safe didn’t come to America earlier. It already has an office in London, and other large Asian state investors already have a presence in North America, among them China Investment Corporation (CIC) and Korea’s National Pension Service.

Of course it’s not essential for investors of this size to have foreign offices – service providers will happily come to them wherever they are. Yet planting a flag in this manner makes a statement. “It’s an important PR tool back home,” says the fund executive, as well as providing closer contact with target markets.

Moreover, it makes sense for Safe to have a presence close to the New York Federal Reserve, given its huge exposure to US Treasuries ($1.25 trillion as of March).

(CIC’s office in Toronto makes similar sense, due to the sovereign wealth fund’s interest in buying strategic natural resource assets. Canada is home to many listed mining and energy companies.)

Safe is reportedly seeking to use the new office to increase its allocation to private equity, real estate and other alternative investments. Thus it appears to be moving further into less mainstream territory more typically occupied by CIC.

Reserve managers are more likely to invest in core or core-plus infrastructure and trophy properties in major capital cities, for example, but will generally leave private equity and venture capital to the sovereign wealth funds, note market participants.

That has been gradually changing, however, as investors globally have been forced into riskier assets in search of yield. Take Bank of Korea, which recently said it is looking at the prospect of investing in alternatives at some point in the future.

A further reason for diversification by conservative organisations such as Safe is that governments may be realising there are limits to state investment companies’ capacity, says the unnamed executive.

“The big fundamental question that’s underlying all this is: without political pressure, would central banks be funding state investment companies?” he adds. “Which central banks have you met that would want to part with their reserves easily?”

Safe did not respond to requests for comment for this article.