Zhu Changhong Resigns as SAFE Chief Investment Officer, Agency Says -- Update

By Lingling Wei and Bob Davis 

BEIJING--The invisible man behind China's $3.8 trillion foreign cash hoard is disappearing.

Zhu Changhong, a former star bond trader in the U.S. who was recruited by Chinese officials about four years ago from investment firm Pimco to manage the country's massive foreign-exchange reserves, resigned unexpectedly, officials said Tuesday. The move comes as China grapples with boosting returns at a time of increased turbulence in global markets.

In a statement to The Wall Street Journal, China's State Administration of Foreign Exchange, the division of the central bank that manages the currency reserves, said the 44-year-old Mr. Zhu is set to wrap up his mission at the agency at the end of the month.

His departure was made "according to plan," the statement said, while adding that Mr. Zhu played "an important and outstanding role" in managing the reserves.

SAFE press officials declined to comment beyond the statement. Mr. Zhu, whose title was chief investment officer, declined to comment and referred questions to SAFE.

The agency doesn't disclose returns. But Mr. Zhu won praise inside and outside the agency for persuading his superiors to invest more in U.S. corporate bonds, equities and real estate, rather than relying on the safe-but-dull investments in U.S. Treasurys that were SAFE's hallmark. Outside the agency, he was dubbed "the invisible man" by China's media for his unwillingness to appear in public or have his pictures taken.

"Zhu's departure is a big loss to SAFE, and to China," says Peng Junming, a former SAFE official who runs his own investment firm, Empire Capital Management.

It isn't clear why Mr. Zhu left. But people familiar with his work at SAFE said he had trouble navigating internal politics at the secretive Chinese government agency. His two decades in the U.S. was held against him by some colleagues who felt slighted that he was given such a plum position without having to work his way through the Chinese hierarchy, they said.

"Zhu's performance was viewed positively, but there was always some doubt over whether he would fit in longer term," said a Chinese government official.

Not all those with long U.S. experience have had similar problems. SAFE's chief, Yi Gang, taught for years at Indiana University.

Mr. Zhu was the right-hand man to investor Bill Gross at Allianz SE's Pacific Investment Management Co., or Pimco, before Chinese officials recruited him to SAFE in late 2009. SAFE manages the foreign currency China's central bank buys to control the value of the yuan.

While at SAFE, Mr. Zhu convinced the agency to bet on Japanese equities in the second half of 2012 before they rose sharply, said individuals familiar with his work, though the size of the position wasn't clear. He also boosted SAFE's investments in European debt when many other investors were wary of its riskiness, the people said.

In June 2010, just after Mr. Zhu started at SAFE, about 45% of China's reserves, or $1.11 trillion, were invested in U.S. government bonds, according to an analysis by ChinaScope Financial, a financial data provider. Since then, China's overall purchases of U.S. debt increased, but Mr. Zhu steadily helped reduce the percentage devoted to Treasurys to about 35%, or $1.29 trillion, in September 2013, the most recent figures available.

It isn't clear what Mr. Zhu plans to do next. SAFE officials said the agency's policy forbids ex-employees in certain positions from competing with SAFE for a certain period.

His successor will face a quickly changing landscape. The U.S. Federal Reserve is expected to continue tapering bond purchases to stimulate the U.S. economy and perhaps to start to raise interest rates. Economists say those actions should help boost the value of the dollar and make U.S. assets more attractive.

Many emerging economies view the Fed's actions with alarm because they fear they would lose the investments needed to pay off their foreign debts. In recent weeks, currencies in many developing countries including Argentina, Brazil and Indonesia have fallen, and markets have sunk in part because of fears those economies could get hit.

With its vast reserves and largely closed financial system, China is in a different situation. SAFE welcomes the Fed action, central bank advisers said, because it might reduce the buildup of China's foreign-currency holdings. For years, China has invested most of its reserves in dollars and seen the value of its holdings sink as the dollar loses its value against the yuan.

Mr. Yi, the SAFE chief, has argued publicly that China should take a number of steps to slow the growth of China's foreign reserves or even to reduce them. Those steps include allowing the market a bigger role in determining China's exchange rate, rather than having the central bank intervene regularly to slow its appreciation, and making it easier for Chinese citizens to invest overseas and for foreign capital to come in.

If China were to fully open up the so-called capital account, economists at the International Monetary Fund estimate, the overall result would be a net outflow of $1 trillion to $1.6 trillion.

But Mr. Yi has yet to convince the leadership to take such steps. Standard Chartered estimates that China's reserves will grow another $400 billion in 2014 largely because it expects the country's trade surpluses to widen.

Write to Lingling Wei at [e-mail] and Bob Davis at [e-mail]