G7 mulls better use of oil money and China's reserves

By Yoko Nishikawa
Reuters
Saturday, April 14, 2007

http://www.reuters.com/article/gc04/idUST32874320070414

WASHINGTON -- Saudi Arabia, United Arab Emirates, China, and Russia discussed with G7 nations how surpluses derived from oil sales should be invested and Beijing's plans to more actively manage its foreign reserves, a senior Japanese finance ministry official said late on Friday.

After the official meeting, the G7 -- Britain, Canada, France, Germany, Italy and Japan and the United States -- held a dinner session with some non-G7 nations, often dubbed as a G7 "outreach" meeting.

At the outreach meeting, discussions focused on what kind of options oil-producing countries have to use their surpluses earned from oil sales more effectively.

These included boosting domestic investment to increase their oil supply capacity as well as improving the lives of future generations, the official said.

They also talked about plans to raise investment abroad, such as building refinery facilities outside their countries, and how to invest surplus money in capital markets.

China's vice finance minister and deputy central banker also told participants about the country's plans to manage its $1.2 trillion foreign exchange reserves, the world's largest, the official said.

"What's new about today's discussion was that China explained that they would manage their foreign reserves outside and will not convert them back to the yuan," the official said.

When asked to clarify further, the official said China did not provide more details.

"They did not go into discussions on whether they will keep the dollar-denominated assets in dollars or whether they would shift them out of the dollar into the euro," he added.

Chinese representatives did not comment on the size of such reserve management plans or which foreign currencies will be involved, he added.

China is setting up a new investment agency to seek higher returns on its foreign currency reserves as it explores new ways of using the reserves.

The currency breakdown of China's foreign reserves holdings is a state secret but a large portion of the reserves is parked in U.S. dollar assets.

China's financial firepower means the fund has the potential over time to make a big impact on world markets, but Chinese official have said the creation of the new investment agency would not have an adverse impact on the U.S. dollar.

China has given no details of how much money the agency would manage, let alone how it might invest, but Finance Minister Jin Renqing has said Singapore's state-owned investment company, Temasek Holdings Ltd., would be one of its models.

Russian Finance Minister Alexei Kudrin, who was supposed to attend the dinner meeting as well as the main G7 gathering, skipped those meetings as he did not feel well, the Japanese official said, declining to comment on how serious his illness was.

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