Beijing mulls forex investment vehicle
China's top leaders, attending the National Finance Working Conference, are expected to approve today the establishment of an institution that will invest some of the country's US$1.06 trillion of foreign exchange reserves in offshore assets, sources said.
However, they said an immediate announcement of the plan or disclosure on any details of its investment strategy was unlikely for fear of roiling global markets.
The new investment vehicle is expected to receive US$200 billion to invest in offshore securities, commodities and companies and will take on a role similar to that of Singapore's Government Investment Corp.
'Ideally, the bulk of these offshore investments will be outsourced to global asset managers, as was done by the National Social Security Fund,' said China International Capital Corp chief economist Ha Jiming. 'These asset managers will have to bid for the mandates and this will make the entire process more transparent.'
At present the State Administration of Foreign Exchange is in charge of investing most of China's foreign exchange reserves. The investments usually are made in low-interest US Treasury bonds and other high-quality assets.
'SAFE has no incentive to pay attention to the returns on this money,' a source said.
The country's growing foreign exchange reserves not only increase political pressure from its trading partners to make the yuan appreciate faster but have also led domestic critics to call for investments in higher-yielding assets.
'In the past couple of years China has been shifting money from high-quality assets to more risky ones which has helped increase global risk appetite,' said Peking University finance professor Michael Pettis. 'Once you reach a certain level, simply buying US treasuries is no longer the best use of those reserves.'
China needs no more than US$360 billion of foreign exchange reserves for emergency external liquidity needs, Credit Suisse estimates showed.
The reserves have grown rapidly since 2000, when they stood at just US$165.6 billion and are now the largest in the world. Their growth has accelerated in recent years, thanks to the government's policy of gradual yuan appreciation that requires it to buy massive amounts of dollars in the open market.
Some of the reserves could also be used to recapitalise domestic financial institutions on the condition they would stay on the books in foreign currency and would not be converted into yuan, the sources said.
