China could safely diversify reserves -ADB

Updated: 2007-04-05 08:31

China could safely diversify half of its foreign reserves, currently worth more than US$1 trillion, but that is unlikely to occur in the short term, a top official for the Asian Development Bank said on Wednesday.

Ifzal Ali, chief economist for the ADB, said the build-up in China's reserves "is going too far," and costs to maintain it invested in liquid assets, like U.S. Treasury notes, are "too high."

He said about US$500 billion of China's reserves could be set aside to be more actively managed by a new investment agency that is being created by the government, as part of a strategy to boost returns.

"But this will not happen soon," he told investors at a presentation in New York. "At the best, over the next two or three years you will see about US$200 billion being put into this investment corporation."

One of the reasons for the slow pace of the reform is that Chinese authorities have to develop expertise on how to operate such an agency -- which would be fully backed by the government but operating like a private fund, following the Singaporean model.

"The Singaporeans took 20 years to develop that," Ali said, adding that Chinese authorities always start with "baby steps."

"They dip their toe in the water to get the idea of the temperature. If they are comfortable, they will act very quickly. But they are not going to plunge in a hurry."

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