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 US$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 money.
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 contingencies.
Lin Yifu, an economist at Peking University, said any excess
should be allocated for better returns.
In late 2003, SAFE transferred US$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 currency.
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 percent last year, has
in recent years been deemed a major threat to the health of the
economy.
(China Daily February 2, 2007)