China to invest its foreign currency reserves

China to invest its foreign currency reserves
By Jim Yardley and David Barboza
Copyright by The International Herald Tribune
Published: March 9, 2007

BEIJING: The Chinese government on Friday announced the formation of a new agency to oversee investment of China's $1 trillion in foreign currency reserves, representing a potent new force in international finance.

Finance Minister Jin Renqing offered no specifics about how much of the currency reserves would be made available to the investment agency. But analysts say the agency is expected to control one of the world's biggest investment funds, and one that could singlehandedly alter the value of many assets.

The government said one model for the agency was Temasek Holdings, the Singapore government's successful investment agency, which manages an $84 billion global portfolio of investments.

China already has the world's largest foreign exchange holdings, and they are growing rapidly because of the country's huge trade surpluses. Most of the reserves China now accumulates are conservatively invested in U.S. Treasury bonds and other government securities, which earn little return for China yet help to keep interest rates in the United States and other countries low.

But the investment agency being established will allow China to diversify its foreign exchange holdings. Analysts say the agency could deploy hundreds of billions of dollars to acquire financial or strategic assets around the world, particularly in
"They're not going to be looking for financial assets, but energy assets and natural resources, minerals — things China desperately needs," said Jing Ulrich of J.P. Morgan.

China's currency-exchange reserves are now held by its central bank, the People's Bank of China, and most of the reserves are expected to continue to be held there, in safe, conservative investments in government securities.

But a large sum of money is expected to be shifted to the new agency or investment group, which could aggressively invest it for higher returns. Some of the money could even possibly be used to acquire stocks, corporate bonds or real estate holdings in other parts of the world.

Some financial experts are already talking about the huge potential impact of China's emergence as a major global investor, and how that could push asset prices higher and create even more competition for scarce resources.

But Jin, the finance minister, suggested that the new investment agency would not simply be allowed to speculate.

"The biggest priority is safety, and under the principle of security we will try to will try to increase the efficiency of management and the investments' returns," Jin said at his news conference during the two-week meeting of the National People's Congress, the country's largely ceremonial national legislature.

The decision to form the new agency has been rumored for months, and Prime Minister Wen Jiabao said in January that the government was exploring new ideas about investing the currency reserves.

Andy Rothman, a strategist at CLSA Asia-Pacific Markets, said the government would probably be extremely conservative in how it invested and would initially use only a small fraction of its overall reserves.

Rothman said, "I think they'll be very conservative at the beginning and probably give them about $20 billion at the beginning."

"It's not all of a sudden going to change the world," he added.

"I think they are going to move very, very slowly to diversify what they are doing. Nobody should expect that suddenly they are going to invest $1 trillion."

Some analysts say the formation of the new agency means that Beijing is moving away from heavy reliance on investing in dollars through U.S. Treasury securities, and that could affect interest rates in the United States, which are being kept down by China's huge purchases.

But foreign exchange reserves are accumulating so quickly in China, at more than $20 billion a month, analysts say, that it's possible that for the time being the agency would be operating with only a small portion of the money now accumulating.

China's foreign exchange holdings are just one of the latest signs of the country's spectacular rise — and of its growing influence in the global economy and financial markets.

With that growth have come rising costs for education, health care and pension funds. Making a better return on government holdings, analysts say, will allow the government to cope with some of these problems.

Rothman said the formation of the new investment agency should be viewed in the context of other new government measures, like the recent efforts to pass a private property law and a law to equalize corporate taxes. He said China was trying to create the legal and regulatory structure to underpin its still-evolving market economy.

in, the finance minister, said the new agency would answer directly to the State Council, the equivalent of China's cabinet.

David Barboza reported from Shanghai.