China Gets Aggressive With Forex Reserves

Did you know China has more than $1 trillion in foreign currency reserves after posting huge trade surpluses year after year !! Add to that China's reserves is growing at $20 billion every month !! For China, that is simply spectacular, for U.S. well...sigh*

So what does China do with the 1$ trillion ? Right now they have invested approximately 75% in low-yielding U.S. Treasury securities and other dollar-denominated assets. The rest in euros and a small amount in yen. Returns on this investment has been less than 3% last year. Not quite exciting. But that is going to change....

Need a Change
China now plans to make better use of their reserves and reap in more profits. One way to do that is create an investment company, and that is exactly what they are upto. China will soon create one of the world's largest investment funds, with diversification in global stocks, bonds and commodities markets. It is estimated that they will allocate somewhere between $200 to $400 billion to this new venture. The company named Lianhui will buy 20-25% of forex reserves from the central bank for investment.

Why the Change ?
China wants to invest its reserves to support an economy that grew 10.7 % last year, without causing large swings in global markets. The trade gap has increased driving reserves to a record. The surplus and China's foreign-currency holdings have left the economy awash with cash, making it difficult for the government to slow lending and investment to curb asset bubbles. The nation is trying to slow investment and lending to curb inflationary pressures and asset bubbles in property and stock markets. The surge in money flooding in, forces the central bank to drain billions of dollars from the economy every month by selling bonds in order to reduce inflationary pressures.

Temasek Model
China intends to follow the model of Singapore's Temasek Holdings, which manages nearly $90 billion in government pension funds and other assets. Temasek Holdings average returns has been 18%. China would love to cash in on such returns.