The government will set up a company to manage its hefty foreign exchange
reserves, according to an influential newspaper.
China Securities Journal, which is owned by Xinhua News Agency, quoted
unnamed "authoritative sources" as saying that the establishment of the State
Foreign Exchange Investment Company would represent a major initiative to better
utilize the country's huge foreign exchange assets and to address the issues
brought up by their accumulation.
China has the world's largest foreign exchange reserves, which amounted to a
whopping $1.07 trillion at the end of 2006, and are poised to swell further.
Premier Wen Jiabao said at the National Financial Work Conference last month
that the country should "explore new means and extend channels" for the use of
The assets are currently managed by the State Administration of Foreign
Exchange (SAFE). A considerable part of the money is believed to have been used
for the purchase of United States treasury bonds.
Economists have said that the reserves far exceed the amount needed for their
main purpose international trade payments, paying back external debts and
Lin Yifu, an economist at Peking University, said any excess should be
allocated for better returns.
In late 2003, SAFE transferred $45 billion to Central Huijin Investment Co
Ltd, which used the money to recapitalize State-owned Bank of China and China
Construction Bank. The injection of the funds was a crucial step for the
restructuring of two banks and their eventual listing.
Huijin has also invested in dozens of other State-owned banks and brokerages.
The China Securities Journal said the new investment company would raise
funds by issuing renminbi bonds and use the money to purchase foreign exchange
reserves from SAFE.
This will help reduce excessive money supply, which is created by the huge
amounts of renminbi that the central bank has to put into the market when it
buys foreign exchange from enterprises to maintain the stability of the
Excessive money supply is partly responsible for the country's high fixed
asset investment growth in the past few years. Fixed asset investment growth,
which stood at 24 per cent last year, has in recent years been deemed a major
threat to the health of the economy.
(China Daily 02/02/2007 page1)