Beijing is to create one of the world's biggest investing companies, with
possible ramifications for global stock, bond and commodities markets, and might
also affect how the US finances its huge budget deficits.
Chinese Finance Minister Jin Renqing said on Friday in Beijing on the
sidelines of the ongoing National People's Congress session, that Beijing is
trying to make more profitable use of its $1 trillion in foreign currency
reserves. It is believed that most of the reserves are now parked in safe, but
relatively low-yielding US Treasury securities and other dollar-denominated
Chinese Finance Minister Jin Renqing gestures at a news
conference during the annual session of the National People's Congress in
Beijing March 9, 2007. [Reuters]
"We can achieve more profit from (wiser) investments (of the reserves)," Jin
said at a news conference. "We are now in the stage of forming this new
The finance minister said China 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 officials have said repeatedly they want to make better use of the
world's largest standing foreign currency reserves. Economists have suggested
Beijing might allocate as much as $200-$400 billion to the new company, which
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."
A shift in China's investment strategy could change its purchases of foreign
government debts, affecting a market that Washington relies on to help finance
multibillion-dollar budget deficits, and might eventually push up US interest
rates. But Lehman Brothers' Sun played down that risk. He said that with its
reserves growing by as much as $20 billion a month, Beijing could afford to keep
buying US government bonds while also channeling billions into new
Even so, news of the Chinese announcement - along with an upbeat US jobs
report, which reduced expectations the US Federal Reserve will cut its interest
rates - came on the same day of a big drop in the price of the benchmark 10-year
Treasury note on Friday. That pushed up its yield to 4.58 percent from 4.51
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 to the
company or when it would start to operate. Spokespeople for Jin's ministry and
China's central bank declined to give any other details.
US Treasury Secretary Henry Paulson, in an interview this week on the US
television network ABC, rejected suggestions that changes in Chinese bond
purchases could affect the United States economy. Paulson said Beijing's entire
holdings of US Treasuries 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 domestically and reduce its 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 currencies, and by the billions
of overseas 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
The precise composition of China's foreign currency reserves is a secret. But
economists believe that as much as 75 percent is believed to be in US
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 $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.