More investing by China

March 10, 2007|By New York Times News Service

BEIJING --China will create a new agency to invest the country's immense reserves of foreign currency, now totaling more than $1 trillion, the country's finance minister announced yesterday.

The minister, Jin Renqing, offered no specifics about how much of China's currency reserves would be under the new agency's control. But whatever the precise figure, analysts say that the agency is certain to begin life as one of the world's biggest investment funds.

China's currency holdings are the world's largest, and they are growing rapidly because of China's huge trade surpluses. Most of the reserves are now invested very conservatively, in U.S. Treasury bonds and other government securities, a strategy that helps to keep interest rates low in the United States and other developed countries but earns little profit for China.

The new agency will be able to invest some of the money more diversely and aggressively, analysts said, with the possibility of hundreds of billions of dollars put into acquiring "strategic assets" - mines, oil fields, whole companies - around the world, especially in developing countries in Africa and Latin America.

"They're not going to be looking for financial assets, but energy assets and natural resources, minerals, things China desperately needs," said Jing Ulrich, an analyst at J.P. Morgan Securities Inc.

The government said the new agency would be modeled in part on Temasek Holdings, the Singapore government's hugely successful investment agency, which manages an $84 billion global portfolio of investments.

Like most countries, China's huge foreign exchange reserves are largely kept as insurance, in case of a financial panic or swift reversal of fortune for the economy.

The reserves are held by the Chinese central bank and most of the reserves are expected to remain there, in safe, conservative investments in government securities. But the new agency is expected to get a substantial portion to work with.

Some financial experts are talking about the huge impact China could have as a major global investor, and the possibility that its purchases could push asset prices higher and create even more competition for scarce commodities and resources.

But Jin, the finance minister, said the new investment agency would not be allowed to simply speculate.

"The biggest priority is safety, and under the principle of security, we will try to increase the efficiency of management and the investments' returns," Jin said at a news conference yesterday, held as part of a two-week meeting of the National People's Congress, China's largely ceremonial national legislature.

He said the new agency would answer directly to the State Council, the equivalent of China's Cabinet.

Some analysts say the formation of the new agency means China is moving away from heavy reliance on investing in U.S. dollars through Treasury securities, and that could affect American interest rates, which remain low in part because of China's huge bond purchases.

But the country's foreign exchange reserves are accumulating so quickly - by more than $20 billion a month, analysts say - that China is likely to continue buying huge numbers of Treasury bonds for a long time, even if the new agency gets a fast start.

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