In SAFE hands: China's secret plan for a US$1 trillion reserves fund in Hong Kong

Halfway up a 37-storey tower overlooking Hong Kong’s Victoria Harbour, within walking distance from the People’s Liberation Army barracks and the classy Hong Kong Club, sits an unassuming office of a fund manager with an outsize role in the global financial markets.

The spartan office, with two tiny flags of China and Hong Kong providing the only splashes of warmth in a grey, cold ambience, belongs to SAFE Investment Company, the custodian of a third of China’s US$3.227 trillion foreign exchange reserves, according to official records.

Established a month before Hong Kong’s formal return to China’s sovereignty in 1997, the unit was the first of four so-called “golden flowers” – Hua’an, Huaxin, Hua’ou and Huamei – set up by the State Administration of Foreign Exchanges (SAFE) to diversify its reserves and maximise returns. Hua’an, the Chinese name of its Hong Kong unit, signifies the wish for the nation’s security.

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Its existence was alluded to in mid-January, a week before Donald Trump’s formal return to the White House, when Pan Gongsheng, governor of the People’s Bank of China (PBOC), said the central bank would “significantly increase” the allocation of the nation’s reserves to Hong Kong.

SAFE investment Company at the AIA Central tower in Hong Kong on March 6, 2025. Photo: Jonathan Wong alt=SAFE investment Company at the AIA Central tower in Hong Kong on March 6, 2025. Photo: Jonathan Wong>

That statement provoked more questions than answers, with analysts, academics and lawmakers quizzing officials on the amount, rationale, strategy and timing behind that financial support.

Xia Chun, the chief economist at SSC Research Institute in Hong Kong, estimates that about 16 per cent of China’s foreign exchange reserves are kept in Hong Kong. A “substantial increase”, as hinted by PBOC, could mean almost tripling that allocation over the long run, he said.

“In the medium term, increasing to 30 per cent from 16 per cent could result in a significant rise of US$400 billion in reserves allocated to Hong Kong”, he added. “This will serve as a medium-term positive factor for the Hong Kong stock market. In the long term, an allocation of up to 50 per cent would still be feasible.”

That view has some backing. Eddie Yue Wai-man, the chief executive of the Hong Kong Monetary Authority (HKMA), believes the proposed extra allocation would flow into the city’s equity and bond markets, according to his briefing to lawmakers last month.

“We are very supportive of [Pan’s] talk about significantly allocating foreign exchange reserves in Hong Kong”, Yue said at the Legislative Council meeting on February 3. He declined to quantify the PBOC support, implying secret and market-sensitive information. “If more of the reserves are invested in our market, it will definitely improve our liquidity and sentiment.”

China has diversified its holding of foreign currencies in its reserves as geopolitical tensions escalated. The US dollar made up 55 per cent of its currency composition in 2019, versus the global average of 61 per cent, according to SAFE’s annual reports. The ratio was 65 per cent in 2010.

That is reflected in its holding of US Treasuries, the gold standard in global government bond markets.

China, which overtook Japan as the largest foreign holder of Treasuries in 2008, owned US$1.3 trillion of the securities at its peak in 2013, according to government data. It held US$1.26 trillion in 2015, or 37.4 per cent of its reserves, US$1.07 trillion (34.4 per cent) in 2019 and US$759 billion (23.7 per cent) last year.

Some countries, including China, would be cautious about investing more in US treasuries due to geopolitical tensions and fiscal deficit, according to Wang Ju, head of foreign-exchange and rates strategy for Greater China at BNP Paribas in Hong Kong. The Hong Kong market thus represents the “optimal choice” for China, she added.

Assuming an additional 10 per cent of China’s foreign exchange reserves is invested in Hong Kong dollar bonds, the city’s US$350 billion bond market would receive a US$300 billion shot in the arm, she estimated.

Even though details are scarce, the PBOC’s support for Hong Kong is seen as a pre-emptive foil against volatilities in the stock and currency markets – especially in an international financial hub where capital swarms in and out with little impedance – which have confounded investors barely two months into Trump’s second term.

Conflicts between China and the US will inevitably arise, and Hong Kong could help mitigate some of the pressure, experts say. The city has successfully navigated multiple financial shocks, including the Asian financial crisis in 1997 and the global financial crisis in 2008.

PBOC Governor Pan Gongsheng attends a press conference in Beijing in September 2024. Photo: Reuters alt=PBOC Governor Pan Gongsheng attends a press conference in Beijing in September 2024. Photo: Reuters>

“China’s financial strength is even greater today, with the world’s largest foreign exchange reserves providing a strong backing for Hong Kong’s financial stability and security”, Pan said at the Asian Financial Forum in January. China has “the confidence, conditions and capability to maintain the stable operation of the foreign exchange market”, he added.

SAFE invests in international bonds, equities and alternative assets through units in Hong Kong, Singapore, New York (Rosewood Investments), London (Gingko Tree Investments) and Frankfurt, according to data compiled by the Sovereign Wealth Fund Institute. About 22 per cent of its money is invested in alternative assets.

To be sure, SAFE Investment Company in Hong Kong is not the only vehicle deploying China’s foreign exchange reserves. Beijing also entrusted about a third of its reserves to China Investment Corp, a vehicle established in 2007 to diversify and maximise returns. The sovereign wealth fund has offshore units based in Hong Kong and New York.

Allocating more foreign reserves to Hong Kong could strengthen the city’s financial position. The city could become a key battleground in future conflicts with the US, and Pan’s statement could be interpreted as a signal that China is prepared to further trim its holdings of US Treasuries.

“Sometimes, through informal channels or non-official sources, people say that China might sell off a portion of its US Treasury holdings, as this could have a significant impact on the US financial market,” said Zhang Jun, dean of the School of Economics at Fudan University in Shanghai. “It could be used as a form of leverage to bargain with the US.”

The head office of the State Administration of Foreign Exchange in Beijing. Photo: Yuke Xie alt=The head office of the State Administration of Foreign Exchange in Beijing. Photo: Yuke Xie>

US Treasuries have declined in value in recent years, according to SSC Research’s Xia. Adding more Chinese state-owned enterprises (SOEs) and steady-dividend stocks listed in Hong Kong would represent a strategic shift in investment direction, he added.

Shifting reserves towards Hong Kong would strengthen the credibility of the currency board, according to Michael Pettis, a professor of finance at Peking University. “Technically, this could be a way of expanding liquidity in the Hong Kong market.”

Hong Kong operates a currency board, which stipulates that its monetary base must be at least 100 per cent backed by foreign exchange reserves. While that ratio stood at more than five times the currency in circulation as of February, an explicit backing from the PBOC could serve as a deterrent to currency speculators, according to Xu Bin, a professor of economics and finance at the China Europe International Business School in Shanghai.

The local dollar is linked to the US dollar at a fixed exchange rate of HK$7.80 per US dollar, and the HKMA intervenes if necessary to keep the value within its HK$7.75 to HK$7.85 trading band. The link has been challenged in the past, most recently during the pandemic when Hong Kong was facing a recession.

“Higher demand for Hong Kong dollars could ease the pressure on the currency peg,” said Xu. By simply making the statement, the PBOC also sent a signal to say “we will serve as a strong backing for the Hong Kong Linked Exchange Rate System,” he added.

Cheng Hao worked from home during his stint as deputy chief operating officer of China’s State Administration of Foreign Exchange in Beijing. Photo: Handout alt=Cheng Hao worked from home during his stint as deputy chief operating officer of China’s State Administration of Foreign Exchange in Beijing. Photo: Handout>

SAFE Investment Company was founded in June 1997. It has been a tenant at the AIA Central tower on Connaught Road Central since 2011, according to Land Registry records. Its monthly rent would have fallen by about a third from the HK$2.06 million (US$265,000), or HK$147 per square foot 14 years ago, agents said.

Cheng Hao, the man at the helm of the reserves management vehicle, is no stranger to financial crises.

Before his appointment as a director of SAFE Investment Company in Hong Kong in January, the chartered accountant served as the deputy chief operating officer in Beijing, according to his LinkedIn profile. He was also a senior vice-president between 2014 and 2016 during China’s worst stock market crash.

Cheng managed Kunteng Investments, a fund used to buttress the nation’s stock market during the US$5 trillion meltdown in 2015. Its holdings included stakes in Gemdale Corp, Bright Dairy & Food, Tianjin Port Development, China Unicom, and Zhuhai Huafa Group, according to a 2018 report by the state-run Beijing Youth Daily newspaper.

The fund was part of Wutongshu Investment, a SAFE platform and a “national team” member seeded with 27 billion yuan (US$3.7 billion) firepower to rescue the market.

He did not reply to a request for an interview.

China’s central bank has made a series of moves since January to support Hong Kong’s status as a global hub for the offshore yuan, including a 100 billion yuan trade financing facility for banks and a new programme for offshore yuan repurchase agreements, or a short-term borrowing instrument.

Hong Kong’s role as an international financial centre needs to be further strengthened to avoid complacency, given the fresh challenges from trade tariffs and geopolitical rivalries, according to Yang Jianwen, a researcher at the Shanghai Academy of Social Sciences.

“Hong Kong’s role as an international financial centre is irreplaceable by any other place in mainland China,” he said. “Increasing the proportion of foreign exchange reserves to Hong Kong’s financial assets is a viable approach.”

Additional reporting by Salina Li

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2025 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2025. South China Morning Post Publishers Ltd. All rights reserved.