China's foreign reserves rise past $1.2 trillion

By Joe McDonald
Associated Press
via Yahoo News
Thursday, April 12, 2007

http://news.yahoo.com/s/ap/20070412/ap_on_bi_ge/china_foreign_reserves;_...

BEIJING -- China's foreign reserves, already the world's largest, have risen past $1.2 trillion, a state news agency said Thursday, amid surging trade and plans to create a multibillion-dollar company to invest some of the stockpile.

The figure, as of the end of March, represented a 37.4 percent rise over the same period last year, the Xinhua News Agency said, citing the central bank.

China's reserves have risen rapidly as huge trade surpluses and foreign investment force Beijing to drain billions of dollars from the economy every month through bond sales to hold down pressure for prices to rise. The money is stockpiled in U.S. Treasury bonds and other foreign assets.

The government announced last month it will create a multibillion-dollar company to invest a portion of the reserves in hopes of making more profitable use of the money.

No details of the company's size, when it will be launched or how it will make investments have been released. But economists say Beijing might allocate as much as $200 billion to $400 billion to the venture.

Figures released this week showed China's trade surplus for the first three months of the year doubled from the same period of 2006, reaching $46 billion.

China received $15.9 billion in foreign investment in that January-to-March quarter, an 11.6 percent increase over the same period in 2006, according to the government.

Economists say the rising reserves are a sign not of financial strength but of China's failure to balance flows of money into and out of the economy.

While investment and export revenues are pouring in, Beijing tightly controls the outflow of money, restricting outward investment by Chinese companies. Most companies and individuals need official permission to buy more than a small amount of foreign currency.

The government has been easing restrictions for approval of foreign investments and allowing banks and insurance companies to buy more foreign stocks and bonds.

Beijing also is trying to encourage its consumers to spend more, which would raise imports, narrowing the trade surplus.

Japan has the world's second-largest reserves, which stood at $909 billion as of the end of March.

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

Finance Minister Jin Renqing said last month that Beijing would try to learn from the experience of other governments in creating its investment company.

Jin cited the example of Singapore's government-owned Temasek Holdings, which has $89 billion in investments in banks, real estate, shipping, energy and other industries in Singapore, India, China, South Korea and elsewhere.

China's current foreign holdings are believed to be earning a profit of about 3 percent a year, while Temasek says it averages an 18 percent annual return.

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