By Richard McGregor in Beijing
China is to diversify the use of its swelling foreign exchange reserves, a policy change that is likely to mean a rise in investment in overseas securities and more purchasing of foreign technology and raw materials.
Wen Jiabao, the premier, said after a top-level meeting on finance reform at the weekend that Beijing should improve the management of its foreign reserves and explore ways to diversify their use.
The policy switch opens the way for China, which has been largely passive in managing its money, to establish an agency – akin to Singapore’s Government Investment Corporation and other state investment agencies – to handle a portion of its reserves, already the world’s biggest.
China’s foreign reserves surpassed Japan’s last year to become the world’s largest and reached $1,066bn by the beginning of 2007. They could double within four years if the country’s trade surplus continues to expand and Beijing’s currency policy stays the same.
The government announced on Sunday that it had injected $4bn from the reserves into China Reinsurance (Group) last year to recapitalise it before a possible market listing.
Mr Wen said there were still many problems in the financial sector, including poor corporate governance and poorly managed institutions, and, in some areas, an unstable basic structure.
Mr Wen’s wording on changing the management of foreign reserves was deliberately vague but clear in setting a new path for policymakers.
The reserves are now managed by the State Administration of Foreign Exchange, an agency under the People’s Bank of China, the central bank.
Although Safe does not comment on how it deploys the funds, about 70 per cent of reserves are believed to be held in US dollars, mostly in Treasury bonds, but increasingly in other, higher-yielding instruments.
Safe has been discussing giving small mandates to foreign mutual fund managers with the aim of seeking higher returns than those offered by fixed-income instruments.
Setting up an institution to manage the reserves is likely to take time, as Beijing sorts out competing bureaucratic interests and develops guidelines for how the money should be used.
Another focus of the meeting was rural finance, especially reform of the Agricultural Bank of China, the last of the five large state banks to be restructured.
The government envisages the same makeover for ABC that it applied to the other big state lenders: recapitalisation, probably funded by foreign reserves, followed by an overseas listing and investment by foreign strategic partners. But the bank presents a challenge because of its roots in the countryside, the weakest part of the economy.