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China will form world's biggest investment company [Copy link] 中文

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Post time 2007-3-12 08:55:31 |Display all floors
Beijing to form investment company to run huge forex reserves

( news)

Beijing is to create one of the world's biggest investing companies, with possible ramifications for global stock, bond and commodities markets, and might also affect how the US finances its huge budget deficits.

Chinese Finance Minister Jin Renqing said on Friday in Beijing on the sidelines of the ongoing National People's Congress session, that Beijing is trying to make more profitable use of its $1 trillion in foreign currency reserves. It is believed that most of the reserves are now parked in safe, but relatively low-yielding US Treasury securities and other dollar-denominated assets.

"We can achieve more profit from (wiser) investments (of the reserves)," Jin said at a news conference. "We are now in the stage of forming this new company."

The finance minister said China may follow the lead of Singapore's Temasek Holdings, which manages nearly $90 billion in government pension funds and other assets. It owns stakes in Singapore Airlines and Singapore Telecom, as well as in banks, real estate, shipping, energy and other industries in India, China, South Korea and elsewhere.

Analysts have speculated for some time that China would create an investment company, and officials have said repeatedly they want to make better use of the world's largest standing foreign currency reserves. Economists have suggested Beijing might allocate as much as $200-$400 billion to the new company, which could create one of the world's richest investment funds.

"They want to be more aggressive than what they do with current reserves," said economist Mingchun Sun at Lehman Brothers in Hong Kong.

"They could invest in higher-yield products - stocks, corporate bonds, maybe even commodities," Sun said. "Basically, the returns would be higher because the risk is higher."

A shift in China's investment strategy could change its purchases of foreign government debts, affecting a market that Washington relies on to help finance multibillion-dollar budget deficits, and might eventually push up US interest rates. But Lehman Brothers' Sun played down that risk. He said that with its reserves growing by as much as $20 billion a month, Beijing could afford to keep buying US government bonds while also channeling billions into new investments.

Even so, news of the Chinese announcement - along with an upbeat US jobs report, which reduced expectations the US Federal Reserve will cut its interest rates - came on the same day of a big drop in the price of the benchmark 10-year Treasury note on Friday. That pushed up its yield to 4.58 percent from 4.51 percent.

Jin gave no details of how the Cabinet-level company might invest the reserves, nor did he say what portion of the reserves might be channeled to the company or when it would start to operate. Spokespeople for Jin's ministry and China's central bank declined to give any other details.

US Treasury Secretary Henry Paulson, in an interview this week on the US television network ABC, rejected suggestions that changes in Chinese bond purchases could affect the United States economy. Paulson said Beijing's entire holdings of US Treasuries represent the equivalent of less than a single day's trading in Treasuries on global bond markets.

Chinese economists and media reports have suggested China might adopt more unusual investment approaches, ranging from stockpiling oil and other raw materials to spending more on social programs in order to encourage Chinese consumers to spend more domestically and reduce its dependence on exports.

The growth in China's reserves is driven by the rapid growth of its exports, which brings in dollars, euros and other foreign currencies, and by the billions of overseas investment dollars being poured into the country. The surge in money flooding in from abroad forces the central bank to drain billions of dollars from the economy every month by selling bonds in order to reduce inflationary pressures.

The precise composition of China's foreign currency reserves is a secret. But economists believe that as much as 75 percent is believed to be in US dollar-denominated instruments, mostly Treasuries, with the rest in euros and a small amount in yen.

Stephen Green, chief economist at Standard Chartered Bank in Shanghai, calculated that last year the central bank made a $29 billion profit on its Treasury holdings after paying interest on its own bonds and other expenses.  But even that represents a return of less than 3 percent on the $1 trillion in holdings. By contrast, Singapore's Temasek says it has averaged an 18 percent annual return since it was created in 1974.

[ Last edited by chinadaily at 2007-3-12 11:14 AM ]

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Post time 2007-3-12 08:59:39 |Display all floors

Following comment is written by forumite "cestmoi"

I believe China is taking a step in the right direction to diversify its holdings and improve its returns on investments.

By all means, Beijing should study the Singaporean Temasek model as one possible model.

I believe China should also develop and set up her own WRAP service platform on which investment banks and fund managers disclose their products. That way, China can retain oversight and control on her investment portfolios. The Chinese WRAP service provider takes on the role of a "Trust".

Since China is liaising or will liaise with the Singaporean government, it may be useful for China to look at the job-roles and skillset matrix required to perform these value-added jobs. The Singaporean Monetary Authority has a methodology to do just that. It is comprehensive and it has been used by global investment banks to set up training centres for, inter alia, wealth management personnel. Be aware it is proprietary. So you really need to talk with the Singaporeans. I have high regards for their abilities.

One thing I ask of the Chinese government, please do not give priorities to those investment houses which deserted Hong Kong prior to and after the handover.

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Post time 2007-3-12 09:03:13 |Display all floors

Following comment is written by forumite "norman"

I wish China and Chinese leaders, the central bank managers, esp., success in administering their brand-new huge investment company, and make big returns out of their huge foreign currency reserves.

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Post time 2007-3-12 09:08:38 |Display all floors

Following comment is written by forumite "fundamental"

To diversify huge investments from fixed income instruments is necessary for any nation to preserve its capital when fixed income return is not commesurable with inflation.

If any one invested in US bonds for the last 10 years, the purchasing power of the total of capital and interest has actually declined.

But since China is new at this game, every caution must be exercised. Perhaps a large portion of the fund should be invested in blue-chip stocks and another portion in resource-related stocks, such as ferrous and none ferrous metals and crucial minerals.

Real estate investments, or REITS should be a part of the portifolio too.

I have ridden the roller coaster of investments for some time. It takes trememduous courage to stay the course when the fundementals of the investments are still in place when the market falls owing to some speculators' manipulations or mass hysteria.

China should use stock charts and the skill to analyze the trends and momentums of stocks in combination with the fundamentals of the stocks.

I wish China all the success and I am sure she will succeed in this endeavor with flying colors too.

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Post time 2007-3-12 09:11:35 |Display all floors

Following comment is written by forumite "Ding"

The Chinese government move to set up such an investment company is indeed a long overdue decision. Hope the government will also establish a systematic watchdog institution to safeguard the investment. One measure could be listing the company in the stock market so that everything can be transparent.

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Post time 2007-3-12 12:19:35 |Display all floors

Banker: China to keep buying US Treasuries

Banker: China to keep buying US Treasuries

China will keep buying U.S. Treasuries after a new state investment agency begins operations to help the nation manage its US$1.07 trillion foreign-exchange reserves, central bank Vice Governor Wu Xiaoling said.

China, the second-largest holder of U.S. government debt, wants to invest its reserves to support an economy that grew 10.7 percent last year, without causing large swings in global markets. The dollar slumped 1 percent against the euro in the week ended Nov. 11 after central bank Governor Zhou Xiaochuan said he plans to diversify holdings.

Asked Sunday in Basel, Switzerland, whether China would continue to buy U.S. Treasuries, Wu told Bloomberg News: "Yes." Wu is attending the bi-monthly meeting of central bank governors from the Group of 10 nations.

The People's Bank of China had a 26 billion-yuan (US$3.4 billion) loss from exchange rate movements in 2006, according to estimates by Stephen Green, senior economist at Standard Chartered Bank Plc in Shanghai.

The new agency will seek to "maximize the profits" of the reserves, Finance Minister Jin Renqing said March 9. The central bank's Wu on March 8 said "any area is possible as long as it will ensure and increase the return of our investment."

No Timeframe

Wu told reporters in Basel that a timeframe for setting up the new reserves agency had yet to be set. "It's still under preparation," Wu said.

China is still studying what the agency will invest in, she said.

Wu said former Vice Finance Minister Lou Jiwei is leading a team in the preparations of the new agency. Lou was on March 6 promoted to deputy secretary general of the State Council, the cabinet.

China is unlikely to diversify "massively" away from U.S. Treasuries to prevent the yuan from strengthening, Jan Lambregts, head of research at Rabobank International in Hong Kong, said in an interview Sunday.

The central bank buys dollars to prevent the value of the Chinese currency from rising from the inflows of export earnings. Diversifying away from U.S. Treasuries would mean selling dollars, Lambregts said.

"They have a policy that they will allow gradual appreciation of the yuan, but no more than that," Lambregts said. "They don't want to see the dollar crash. I continue to see the Chinese as substantial buyers of U.S. Treasuries."

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Post time 2007-3-12 12:38:43 |Display all floors

The Amerikan Regime has already got a "reply".

They have "gear up" PRIVATE EQUITY firms with US$150 billion capital.

It could be mayhem at the M&A department!

Green Dragon
God of Prosperity

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