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By LingLing Wei and Bob Davis, WSJ,

BEIJING—At an official Chinese New Year’s party earlier this year, a former bond trader named Zhu Changhong was hailed for the smart choices he made investing the world’s largest stash of cash: China’s $3.5 trillion in foreign reserves.

Tweaking the lyrics of a famous revolutionary song that extolled Mao Zedong, Mr. Zhu’s colleagues jocularly lauded him: “The east is red, the sun rises. From China arises Zhu Changhong…he is SAFE’s savior,” people with knowledge of the event say. SAFE is China’s State Administration of Foreign Exchange, the division of the central bank that manages China’s currency reserves and is one of the most powerful investors in the world.

Mr. Zhu is a key figure in the allocation of trillions of dollars at a time when Europe still is looking for sources of capital and developing countries worry that the resources boom shows signs of ebbing. But despite being charged with directing China’s efforts to diversify its foreign reserves and earn decent returns, little is known about Mr. Zhu; Chinese media call him “invisible.”

A 43-year-old former physicist, Mr. Zhu has made one surprising turn after another in his career. At 20 years old, he moved from impoverished Anhui province to the University of Chicago to study quantum physics, but he then chucked a promising academic career to become a bond trader. He eventually ended up as the right-hand man to investor Bill Gross at Allianz SE‘s Pacific Investment Management Co., the giant investment firm, according to people familiar with Mr. Zhu’s work.

There, Mr. Zhu took on the trappings of the American dream, buying two luxury homes in California and a condo in Las Vegas, according to U.S. property records. But he left that life behind to return to China in late 2009 to become the chief investment officer at SAFE’s reserves-management department.

Acquaintances refer to him as a nerd, and he is so low-key that China’s legions of Internet users complain that there isn’t a single picture of Mr. Zhu online. At SAFE, he portrays himself as just one of a team of professionals that makes investment decisions for the agency, according to people knowledgeable about the agency’s operations.

But he has made his mark at SAFE, persuading his superiors to invest more in U.S. corporate bonds, equities and real estate, rather than rely on the safe-but-dull investments in U.S. Treasurys that were SAFE’s hallmark before Mr. Zhu took the reins.

In a recent sign of his more aggressive style, SAFE bet on Japanese equities in the second half of last year before they rose sharply in value, said individuals familiar with his work, though the size of the position wasn’t clear.

Media officials at SAFE declined to comment for this article.

Despite those bets, expected changes in U.S. monetary policy mean that Mr. Zhu’s main goal isn’t to turn in record results but to try to reduce losses that SAFE would face if U.S. Treasurys continue to fall when the U.S. Federal Reserve reduces its bond purchases.

SAFE “had a very good year last year” under Mr. Zhu’s direction, said a Chinese official. SAFE doesn’t disclose its investments and performance.

In June 2010, just after Mr. Zhu started at SAFE, about 45% of China’s reserves, or $1.11 trillion, was invested in U.S. government bonds, according to a Wall Street Journal analysis of U.S. Treasury and Chinese central-bank data. Since then, China’s overall purchases of U.S. debt increased, but Mr. Zhu has steadily helped reduce the percentage devoted to Treasurys to around 35%, or $1.14 trillion, in June 2012.

He also boosted SAFE’s investments in Japanese equities, European debt, U.S. corporate bonds and equities. Specifics are hard to come by, but between June 2011 and June 2012, for instance, the percentage of Chinese reserves invested in U.S. corporate debt and equities rose to 7% from 5%.

As of May, the most recent numbers, SAFE still had about $1.32 trillion of its reserves in U.S. government bonds. That number may underestimate the actual holdings, analysts said, because of Beijing’s efforts to mask how it invests. The immense size of China’s Treasury holdings means that the value of its currency reserves is largely at the mercy of swings in U.S. interest rates.

That, in turn, leaves SAFE vulnerable to the expected withdrawal of monetary stimulus by the Fed, which is putting pressure on the price of U.S. Treasurys.

Mr. Zhu’s efforts are “too late to do much,” said Yu Yongding, a senior economist at the Chinese Academy of Social Sciences and a former monetary-policy adviser to China’s central bank.

Mr. Zhu joined SAFE after spending 20 years in the U.S. He was personally recruited by SAFE’s director, Yi Gang, who himself had spent many years in the U.S. as an economics professor at Indiana University-Purdue University Indianapolis, according to people with knowledge of the agency’s workings. Mr. Zhu was a big catch for Beijing, whose “1,000 talents program” offers cash awards and research funds to get back talented expatriates, the people said.

His title at SAFE, chief investment officer, sounds technical, but his work is deeply political, said individuals with close ties to SAFE. First, Mr. Zhu had to persuade his superiors to take risks investing China’s reserves, which are viewed as national patrimony and routinely described as xue han qian— money earned by “the blood and sweat” of Chinese workers. Adding to the pressure, China’s big sovereign-wealth fund, China Investment Corp., was criticized in China for taking losses on bets on Wall Street firms before the global financial crisis of 2008, and SAFE didn’t want to open itself to similar criticism.

As a result, SAFE tries to limit its investments outside Treasurys to amounts small enough to hide from the public in case the bets go bad, said a person close to SAFE.

With Mr. Zhu’s endorsement, SAFE was an early investor in bonds issued by the European Financial Stability Fund, according to those involved, and has invested regularly since then in the bailout fund.

The amounts of the investment aren’t disclosed but are likely to be substantial. As the European crisis deepened in early 2012, European officials held brainstorming sessions with Mr. Zhu and other Chinese government officials about how to interest China in bonds that might be used to bail out Italy or Spain, according to individuals inside and outside China who are familiar with the sessions.

Brussels officials wanted to learn what returns Beijing would expect from investments compared to the risk the Chinese might be willing to accept, they said. Mr. Zhu gave “clear indications” of what the Chinese would want, said a person familiar with the talks. In the end, the Europeans didn’t issue the new instruments as the crisis ebbed.

Mr. Zhu’s transformation into investment guru still surprises some old acquaintances. His 1995 dissertation from the University of Chicago, “Inter-Landau Level Polarization and Wigner Crystal,” examined circumstances where electrons strongly interfere and become entangled with one another, a hot area in physics now that may someday lead to breakthroughs in quantum computing.

“Those with an entrepreneurial drive went to Wall Street,” said physicist Paul Wiegmann, Mr. Zhu’s thesis adviser. He said he thought the fast pace of a trader fit his former student, who finished his dissertation in two years, half the usual time.

“I thought he’d do well, but doing so well, that’s a surprise,” Mr. Wiegmann said. “He came from a foreign country, from a rural area, with no experience in the culture and the operation of [U.S.] society. He’s literally self-made.”

http://online.wsj.com/article/SB10001424127887323664204578606301739504368.html

 

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