China likely to set up $200 bn fund to manage forex reserves

Jan 18 | Updated: Jan 19 2007, 05:30am hrs
China may set up a $200 billion investment agency to help manage the nations more than $1trillion of foreign exchange reserves, Standard Chartered Plc economist Stephen Green said.

The new institution may focus on private equity investments and buying strategic raw materials, and be modelled on Singapores state-owned investment company Temasek Holdings Pte, Shanghai-based Green wrote in a report on Thursday.

Government officials gathering this week for the Financial Work Meeting, which takes place every five years, may discuss creating the new agency, Green said. The State Administration of Foreign Exchange, or SAFE, currently manages Chinas currency reserves, the worlds largest.

This could be a huge event: the creation of one of the worlds biggest institutional investors, which a very different set of investment objectives from the SAFE, Green wrote. Chinas foreign reserves reached $1.07 trillion at the end of December, the first time any nations holdings topped $1 trillion. The government is seeking ways to increase returns on its swelling reserves, much of which are invested in US Treasuries and other dollar-denominated assets.

US treasuries returned 3.14% last year, according to Merrill Lynch & Co. The MSCI World Index of stocks jumped 19% in 2006. The government may also use the fund to improve relations with the US by targeting industries where the US is seeking foreign investment to create jobs, said Green.