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[Solve et Coagula]

China seeks new ways to spend US$ 1 trillion

By Zhou Jiangong, Jan 23, 2007
http://www.atimes.com/atimes/China_Business/IA23Cb04.html

SHANGHAI - China has finally decided to diversify disposal of its huge yet steadily growing foreign-exchange reserve by investing in overseas markets, a dramatic departure from its current practice of putting most of its eggs into one basket - US Treasury bonds.

The decision was made at the all-important Central Conference on Financial Affairs, which ended on Saturday.

A state-owned company will be set up to invest the Asian powerhouse's US$1 trillion foreign-exchange reserve in overseas markets.

In his keynote speech to the conference, Premier Wen Jiabao said the government "will strengthen the management of foreign-exchange reserves and actively explore, and broaden, channels and manners for making use of the reserves".

The conference, the third in the past decade and a half, has been proclaimed by Wen as the "turning point" for the country's financial industry.

Most economists and analysts in China have agreed that the country now has too much foreign reserve. They argue that the appropriate amount - a figure that would not cause internal and external imbalances - could be set at about $700 billion. That means China now has an excess of $300 billion that could be used for overseas investment.

China currently puts most of its foreign reserves in US dollar assets, particularly in US Treasury bonds. In this way, when the Chinese currency steadily revalues against the greenback, the foreign reserve is "shrinking" on the book when converted into yuan. The yuan has gained more than 5% against the dollar since July 2005, which means the loss in book value could be up to $50 billion.

Diversifying investment would help reduce the risks involved in managing the huge foreign reserve.

Informed sources say that the new company handling foreign-reserve investment will be derived from the Central Huijin Investment Co. As the investment arm of the central government, Huijin has made its name by injecting reserves of tens of billions of dollars into state-owned banks and other financial institutions.

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