China Begins Management of Foreign Currency Reserves in Earnest

ABSTRACT

1. The China Investment Corporation (CIC), a managing company of China’s foreign currency reserves, was established as a government-affiliated fund. “China money” is gathering attention as it will finally be invested around the world.

2. The primary goals of this establishment are to absorb excess liquidity that leads to economic overheating, reduce foreign currency reserves, manage these reserves efficiently, fulfill the role of holding company of the state-run financial institutions, support foreign investment of companies, and so on.

3. Capital will be generated by issuing special treasury bonds, and foreign reserves will then be purchased from the central bank. The investment plan and managing policy is to have new investment into financial institutions and investment into overseas financial markets, in addition to the traditional investments into financial institutions, operated at one-third each. The policy for overseas investment will primarily focus on securing profits through securities investment, but long-term investment into blue-chip companies will also be conducted. Though domestic and overseas investment is already underway, it will begin in earnest in 2008.

4. Problems and challenges facing foreign reserves management include experience and personnel shortages, the maintenance of transparency, the maintenance of profitability, acceptance into global financial markets, undeveloped legal and systemic structures, and so on.

5. The establishment of CIC and investment into overseas markets is a symbol of China money moving globally and will have a significant impact on the global economy and global financial markets. If the return flow of money in the form of investment in US Treasury bonds is reduced from the independent management of foreign reserves, there is a possibility that it will change the international flow of money.

6. The Japanese market will also be a target for CIC and other external securities investment from institutional investors. The expansion of China’s investment into Japan will help energize the Japanese economy, and will bring about substantial business chances for finance-related companies.