China to Create Huge Fund To Invest Part of Reserves
Saturday, March 10, 2007
BEIJING, March 9 -- China will soon create one of the world's largest investment funds, with ramifications for global stock, bond and commodities markets and for how the United States finances its budget deficits.
Finance Minister Jin Renqing said Friday the aim is to make more profitable use of China's foreign-currency reserves, which exceed $1 trillion and which have piled up as China has posted huge trade surpluses year after year. Most of those funds are now parked in safe, but relatively low-yielding, U.S. Treasury securities and other dollar-denominated assets.
"We can achieve more profit from the investments," Jin said at a news conference. "We are now preparing the organization of this new corporation."
Jin said Beijing may follow the lead of Singapore's Temasek Holdings, which manages nearly $90 billion in government pension funds and other assets. It 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.
Analysts have speculated for some time that China would create an investment company, and authorities have said repeatedly they want to make better use of the country's reserves.
Economists have suggested that Beijing might allocate $200 billion to $400 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 Mingchun Sun an economist at Lehman Brothers in Hong Kong. "They could invest in higher-yield products -- stocks, corporate bonds, maybe even commodities. "Basically, the returns would be higher because the risk is higher."
A shift in China's investment strategy could change its purchases of Treasurys, affecting a market that has helped the United States finance its multibillion-dollar budget deficits and has helped keep U.S. interest rates low.
But Sun played down the chance that U.S. rates could rise. He said that with its reserves growing by as much as $20 billion a month, Beijing could afford to keep buying U.S. government bonds while also channeling billions into new investments.
Jin gave no details of how the cabinet-level company might invest the reserves, nor did he say what portion of the reserves might be channeled through the company or when it would start to operate. Spokesman for Jin's ministry, the central bank and the foreign currency regulator declined to elaborate.
U.S. Treasury Secretary Henry M. Paulson Jr., in an television interview this week, rejected suggestions that changes in Chinese bond purchases could affect the United States. He said China's entire holdings represent the equivalent of less than a single day's trading in Treasurys on global bond markets.
Chinese economists and news reports have suggested that China might adopt less traditional investment approaches, ranging from stockpiling oil and other raw materials to spending more on social programs to encourage Chinese consumers to spend more and reduce dependence on exports.
The growth in China's currency reserves has been driven by the rapid growth of its exports, which bring in dollars, euros and other foreign currencies, and by the billions of investment dollars pouring into the country.
The surge of this money forces the central bank to drain billions of dollars from the economy every month by selling bonds to reduce inflationary pressures.
The precise composition of China's foreign reserves is a secret, but economists believe that as much as 75 percent is held in dollar-denominated instruments, mostly Treasurys, 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 $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 $1 trillion in holdings. By contrast, Singapore's Temasek says it has averaged an 18 percent annual return since it was created in 1974.