Remember China's much-vaunted scheme to butter up the west by encouraging investment in foreign capital markets? Private investors mostly gave the scheme the cold shoulder but the Chinese government put its money where its mouth was — and with disastrous results.

The State Administration of Foreign Exchange, an opaque manager of nearly $2,000bn of reserves, started making huge bets on global stocks early in 2007.

According to the Financial Times, subsequent falls in global stock prices have caused Safe to rack up losses that may exceed over $80bn.

As well as equities, of its high-profile disasters where

An annual survey by the US Treasury reveals that China became a big buyer of US equities just as the markets were about to turn. In the 12 months to June 2008, the total value of US equities held by China soared three-fold to reach $100bn.As well as US equities, Safe also had huge holdings in US bonds and was hit particularly hard by the failure of Freddie Mac and Freddie Mae.

As Safe never never discloses its holdings except to China's political leaders, it is impossible to know exactly how much has been lost. But the country's political leaders are now waking up what the scale of the recent diversification into much riskier foreign assets.

Last Friday, Chinese premier Wen Jiabao called on Washington to ease worries Beijing has about the safety of its vast US assets.

In 2007, the Chinese government tried to encourage domestic investors to follow its lead by diversifying into foreign equities using a scheme called the Qualified Domestic Institution Investor programme. But they preferred to take their chances with China's overheating domestic equity markets and given the dismal investment performance of Safe who can blame them?

More on QDII in these EngagingChina stories.

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