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The government will set up a company to manage its hefty foreign exchange reserves, according to an influential newspaper.

 

China Securities Journal, which is owned by Xinhua News Agency, quoted unnamed "authoritative sources" as saying that the establishment of the State Foreign Exchange Investment Company would represent a major initiative to better utilize the country's huge foreign exchange assets and to address the issues brought up by their accumulation.

 

China has the world's largest foreign exchange reserves, which amounted to a whopping US$1.07 trillion at the end of 2006, and are poised to swell further.

 

Premier Wen Jiabao said at the National Financial Work Conference last month that the country should "explore new means and extend channels" for the use of the money.

 

The assets are currently managed by the State Administration of Foreign Exchange (SAFE). A considerable part of the money is believed to have been used for the purchase of United States treasury bonds.

 

Economists have said that the reserves far exceed the amount needed for their main purpose international trade payments, paying back external debts and contingencies.

 

Lin Yifu, an economist at Peking University, said any excess should be allocated for better returns.

 

In late 2003, SAFE transferred US$45 billion to Central Huijin Investment Co Ltd, which used the money to recapitalize State-owned Bank of China and China Construction Bank. The injection of the funds was a crucial step for the restructuring of two banks and their eventual listing.

 

Huijin has also invested in dozens of other State-owned banks and brokerages.

 

The China Securities Journal said the new investment company would raise funds by issuing renminbi bonds and use the money to purchase foreign exchange reserves from SAFE.

 

This will help reduce excessive money supply, which is created by the huge amounts of renminbi that the central bank has to put into the market when it buys foreign exchange from enterprises to maintain the stability of the currency.

 

Excessive money supply is partly responsible for the country's high fixed asset investment growth in the past few years. Fixed asset investment growth, which stood at 24 percent last year, has in recent years been deemed a major threat to the health of the economy.

 

(China Daily February 2, 2007)