Minister of Finance Jin Renqing confirmed long-standing rumors in March by announcing the creation of an investment agency to invest a portion of China’s US$1 trillion foreign exchange reserves.
While the majority of the reserves will continue to be managed by the State Administration of Foreign Exchange (SAFE), press reports have suggested that up to US$300 billion will be put under the control of the new agency. It will be invested in various higher-yielding equity assets and strategic energy assets around the world or even within the country.
The new investment body is to be headed by Lou Jiwei, former deputy minister of finance and now a cabinet member, and will be modeled in part on Temasek, the Singapore government’s investment arm.
Around 75% of China’s reserves are currently held in US-dollar denominated assets but government officials were keen to stress that the establishment of the agency didn’t signal a shift away from American currency.
Stressing that China’s large US-dollar assets were bought "on the basis of mutual benefit", Premier Wen Jiabao said: "I can assure you that by instituting such a foreign exchange reserve investment company, it will not have any adverse impact on US dollar-denominated assets."
No details about the forex body have been released, but the central bank announced other plans in March to improve forex management to facilitate capital outflows and increase renminbi flexibility.
The proposals included a multi-channel investment system for orderly capital outflows, market-orientated interest rate reforms, more corporate bonds, and changes to banks’ reserve ratio requirements.
The announcement came shortly before China announced a near-record US$23.76 billion trade surplus for February, almost 10 times the figure a year earlier. Exports totaled US$82.1 billion, up 51.7% year-on-year, while imports increased 13.1% to US$58.3 billion. With the full-year trade surplus expected to hit US$230 billion, US senators once again suggested levying a 27.5% tariff on imports from China and canceling the country’s most-favored trading nation status.