Beijing Ready to Take on More Risk with Foreign Reserves

Chinese news sources are citing a report in Shanghai Securities News, which said Beijing will establish a state foreign exchange investment company modeled after Singapore's $90 billion Temasek Holdings. China has an estimated $1.07 trillion in reserves -- the world's largest -- but according to a report by AP, a Standard Chartered Bank analyst said it earned less than 3% last year, compared to Temasek's annual average return of 18% since 1974. A state official reportedly said the new company, to be named Lianhui, will be launched within the year and preparations are now "well underway." Lianhui will operate Central Huijin Investment, the investment arm of the People's Central Bank, which has played a role in injecting capital in Chinese banks to help manage bad loans. According to the Shanghai Securities News report, Lianhui will issue $200b - $250b of Chinese RMB-denominated bonds and will buy a similar amount of forex reserves from the People's Bank. Its first investments will be targeted at China's energy firms. Separately, while at a meeting in Basel, Switzerland, the Vice Governor of the People's Bank said China will continue to buy U.S. treasuries.

Sources: Associated Press, Bloomberg, ShanghaiDaily.com, Xinhua News
Commentary: Treasury Secretary Paulson's Advice To China: Reform and Open Up • China's Trillion Dollar Question • What the Media Isn't Telling You About China's Market
Stocks/ETFs to watch: CNOOC (CEO), PetroChina (PTR), China Petroleum & Chemical (SNP) ETFs: iShares Trust FTSE-Xinhua China 25 Index Fund (FXI), PowerShares Golden Dragon Halter USX China Portfolio (PGJ). Bonds: iShares Lehman Aggregate Bond (AGG), iShares Lehman 1-3 Year Treasury Bond (SHY), iShares Lehman 7-10 Year Treasury (IEF), iShares Lehman 20+ Year Treas Bond (TLT), iShares Lehman TIPS Bond (TIP). Currency: PowerShares DB G10 Currency Harvest Fund (DBV), Euro Currency Trust (FXE)

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