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China creating company to invest US$1 trillion reserves

Associated Press | March 9, 2007

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.

 
 

 

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