China needs to set up a state-run investment agency to manage better the country's $1 trillion in foreign exchange reserves, two senior government economists said on Sunday.
The People's Bank of China, the central bank, should take its cue from the likes of South Korea, Singapore and Hong Kong and set up a government agency to manage part of the reserves, they told an investment forum.
"The central bank itself is not fully capable of managing the foreign exchange reserves to meet long-term strategic requirements," said Xia Bin, a prominent Chinese economist with the Development Research Centre, a think-tank under the cabinet.
Xia proposed that the Finance Ministry issue 200-400 billion yuan ($25-$50 billion) worth of bonds with at least 10-year maturities to buy foreign currencies from the central bank and invest them abroad.
The money could be used for strategic investment overseas or to import of equipment used for environmental protection or rural infrastructure, he said.
At $1 trillion, China's stash of reserves is more than one fifth of the global total, according to estimates by the Bank for International Settlements.
The composition of the reserves is a state secret but bankers believe perhaps 70 percent of them are invested in dollars, principally Treasuries and other bonds.
Xia said China's main economic problem was to balance its international trade. The central bank needed just enough reserves to stabilise the exchange rate and should shift the rest to an asset management company, he said.
"The conditions for such a move are ripe," he said. He was echoed by Li Yang, a senior researcher with the Chinese Academy of Social Sciences, the government's top think tank, and a former central bank adviser.
"Singapore, Hong Kong and South Korea all have professionals to control and manage their huge foreign exchange reserves. They are all managed by fund management companies with strong government backing," Li said.
Li said he had just returned from visits to those countries to study the issue, and he would be submitting proposals to the government.
Despite advocating a separate asset management company, Li said of the central bank's reserves management: "The returns may be better than some would have thought."
China also needs to reform thoroughly its foreign exchange management system to help the central bank carry out monetary policy, and that might happen, he said.
China has raised interest rates twice and bank reserve requirements three times this year. But the banking system remains awash with cash because the central bank, to hold down the yuan, buys most of the dollars coming into China from its surging trade surplus and foreign direct investment inflows.
"There might be some changes to China's foreign exchange reserve management scheme, which would have a significant impact on China's economy and financial industry," Li said.
He did not go into detail but said the yuan next year could rise by more than it has in 2006. Li also saw only a small chance of further monetary tightening and forecast a drop in bond yields next year.
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