BEIJING: China is creating an investment company to make more
profitable use of its US$1 trillion in foreign currency reserves,
the finance minister said Friday, in a move that could change
the flow of billions of dollars in global markets.
Finance Minister Jin Renqing gave no details of how the Cabinet-level
company might invest the reserves, which are believed to be mostly
in safe but low-yielding U.S. Treasury bonds. He also did not
say what portion of the reserves might be channeled through the
company or when it would start to operate.
"We can achieve more profit from the investments,"
Jin said at a news conference. "We are now preparing the
organization of this new corporation."
Analysts have speculated for some time that China would create
an investment company, and officials have said repeatedly they
want to make better use of the country's reserves.
Economists have suggested Beijing might allocate as much as US$200-400
billion (€150-300 billion) to the new company, which in a
single move could create one of the world's richest investment
funds.
"They want to be more aggressive than what they do with
current reserves," said economist Mingchun Sun at Lehman
Brothers in Hong Kong.
"They could invest in higher-yield products — stocks,
corporate bonds, maybe even commodities," Sun said. "Basically,
the returns would be higher because the risk is higher."
Jin said Beijing would try to learn from the experience of other
governments. He cited the example of Singapore's Temasek Holdings,
which manages 129 billion Singapore dollars (US$89 billion; €65
billion) in government pension funds and other assets.
Temasek owns stakes in Singapore Airlines and Singapore Telecom,
as well as in banks, real estate, shipping, energy and other industries
in India, China, South Korea and elsewhere.
Spokespeople for Jin's ministry and the central bank and foreign
currency regulator declined to give any other details.
A shift in China's investment strategy could change its purchases
of Treasuries, affecting a market that Washington relies on to
help finance multibillion-dollar budget deficits.
But Sun said that with the reserves growing by as much as US$20
billion a month, Beijing could afford to keep buying U.S. government
bonds while also channeling billions into new investments.
U.S. Treasury Secretary Henry Paulson, in an interview this week
on the U.S. television network ABC, rejected suggestions that
changes in Chinese bond purchases could affect the United States.
Paulson said Beijing's entire holdings represent the equivalent
of less than a single day's trading in Treasuries on global bond
markets.
Chinese economists and media reports have suggested China might
adopt more unusual investment approaches, ranging from stockpiling
oil and other raw materials to spending more on social programs
in order to encourage Chinese consumers to spend more and reduce
dependence on exports.
The growth in China's reserves is driven by the rapid growth
of its exports, which brings in dollars, euros and other foreign
currency, and by the billions of investment dollars being poured
into the country.
The surge in money flooding in from abroad forces the central
bank to drain billions of dollars from the economy every month
by selling bonds in order to reduce inflationary pressures.
The composition of China's foreign currency reserves is a secret.
But economists believe that as much as 75 percent is believed
to be in U.S. dollar-denominated instruments, mostly Treasuries,
with the rest in euros and a small amount in yen.
Stephen Green, chief economist at Standard Chartered Bank in
Shanghai, calculated that last year the central bank made a US$29
billion profit on its Treasury holdings after paying interest
on its own bonds and other expenses.
But even that represents a return of less than 3 percent on the
US$1 trillion in holdings.
By contrast, Singapore's Temasek says it has averaged an 18 percent
annual return since it was created in 1974.
