Beijing closer to managing foreign reserves more actively

ASIA-PACIFIC: Beijing closer to managing foreign reserves more actively

By Richard McGregor in Beijing, Financial Times
Published: Feb 14, 2007

China's plans to establish a body to manage more aggressively a portion of its $1,000bn (£514bn) in foreign reserves are taking shape, with a senior ministry of finance official slated to take charge of the new institution.

Advisers to the Chinese government said yesterday that Lou Jiwei, the long-standing vice-minister of finance, had been in discussions to take a position which could see him overseeing a $200bn global investment fund.

However, the final shape of the fund remains the subject of an intense internal debate, unlikely to be settled before the annual meeting of the National People's Congress early next month.

The debate is being closely monitored by global investment banks, which stand to win large mandates help China manage the money in offshore securities markets.

Under one proposal before the State Council, China's cabinet, Mr Lou would head an institution responsible for managing investments both at home and abroad. Such a body would incorporate investment companies now under the People's Bank of China - the central bank - which have controlling stakes in a number of the country's largest banks and brokerage houses.

Shareholdings in state banks held by the PBoC's biggest investment company, Central Huijin Investment, were secured using funds from the reserves. But the PBoC has argued that companies such as Huijin had done a good job in reforming the banks and should remain autonomous, said officials close to the talks.

To settle what has at times become a heated debate, the government is considering establishing two institutions, both with ministerial status reporting to the State Council. One, headed by Mr Lou, would be responsible for offshore investments, such as the Government Investment Corp in Singapore; the second would handle domestic investments, and be headed by Xie Ping, the outspoken boss of Huijin.

However, neither the personnel heading the companies nor their structure has been settled. The manner in which any new body acquires the funds from the foreign reserves, which are now managed by a company under the PBoC, has also not been decided.

The reserves are now assets held on the PBoC's balance sheet, and must be "bought" from the central bank before they can be deployed elsewhere.

Haizhou Huang, of Barclays Capital in Hong Kong, said that the new institution could help "siphon off liquidity" from the banking system.