Are China's assets 'SAFE'?

On Friday the FT reported that Wen Jiabao, the Chinese Premier, was worried about the value of China's investments in U.S. assets. Now we know why.

One reason is that China is the largest foreign holder of U.S. public. Increased fiscal spending in the U.S. to boost the economy (if not backed by spending elsewhere) could lead to inflation and a drop in the dollar's value.

Another reason is how China's investments have fared in the equity markets. The State Administration of Foreign Exchange (SAFE) started diversifying into equities early in 2007 and continued until the collapse of Freddie Mac and Fannie May in July 2008. During this time, some 15% of China's $1800 billion of foreign exchange reserves were pushed into the equity market. According to the FT, the subsequent fall in stock prices means that half the value of China's investments in equities has been wiped out.

To add to the lack of transparency in China's handling of its sovereign funds, SAFE uses a Hong Kong subsidiary to invest in foreign equities (Chinese investors are largely barred from investing overseas). Brad Setser of the Council on Foreign Relations reports that SAFE buys Treasuries both through China and through London. But the latter shows up in U.S. data only as purchases by a UK-based bank, thus understating the value of Chinese investments.

Meanwhile, the China Investment Corporation (the official sovereign wealth fund) has become the target of the Chinese blogosphere thanks to the losses it has incurred on investments in Morgan Stanley and Blackstone (the private equity group).

Are further losses in the offing and, if so, when will China's citizens - and the rest of us - get to know?