China set to act on ballooning reserves

  • Business
  • Thursday, 11 Jan 2007

SINGAPORE: China, the first country to amass US$1tril in reserves, is set to revamp the way it manages that stockpile, and investment managers have reason to be both eager and nervous. 

It could channel a portion towards high yielding assets and securing raw material supplies for the fast growing economy, analysts said, but investors are jittery it might lead to further diversification of the hoard into non-dollar assets. 

China’s alarming rise in foreign reserves has sparked calls to chase higher returns to set a precedent for domestic firms and help slake the country’s voracious appetite for raw materials. 

An investment company similar to the Government of Singapore Investment Corp (GIC), which manages more than US$100bil of assets, could take shape in the coming months. 

Top Chinese leaders are expected to discuss the issue at a key financial meeting to be held soon, analysts say. 

“It’s definitely going to happen – the more the reserves, the easier it becomes to take US$10bil or US$20bil of that stockpile to work it through some kind of fund,” said Stephen Green, an economist at Standard Chartered Bank in Shanghai. 

“The problem is not the willingness of the government to do it. The problem is how to do it.” 

Vice Premier Zeng Peiyan has proposed tapping into the bloated reserves to help build strategic stocks of mineral resources for the world’s fourthlargest economy. China is set to post its fourth straight year of double-digit growth in 2006. 

Workers resting at a construction site in Beijing. China will have to struggle with challenges posed by its huge balance of payments surplus. - Reuters

Its steel mills have come under pressure in recent months as they face aggressive price rises by foreign iron ore suppliers. 

“It looks like a stone with which China can kill two birds – the growing imbalance in its international payments and its need for key resources like oil and minerals,” the China Daily said in an editorial published on Dec 28. 

Analysts say reform is in the offing despite the bureaucratic wrangling between the People’s Bank of China (PBOC) and Finance Ministry over which agency should control the new firm. – Reuters  

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