Source: http://www.nytimes.com/2007/03/10/business/10yuan.html
China will create one of the world’s biggest investment funds. It will use this agency to invest a portion of its $1 trillion reserves of foreign currency for the purpose of enhancing its economic expansion.
China’s currency holdings are already the world’s largest, and they are growing rapidly because of China’s huge trade surpluses. Most of the reserves are now invested very conservatively, in United States Treasury bonds and other government securities, a strategy that helps to keep interest rates low in the United States and other developed countries but earns little profit for China.
The new agency would be able to invest some of the money more diversely and aggressively, analysts said, with the possibility of hundreds of billions of dollars being used to acquire “strategic assets” — mines, oil fields, whole companies — around the world, especially in developing countries in Africa and Latin America.
China is determined to gain as many energy and natural resources as it can lay its hands on. With the huge economic and military expansion it is undertaking, the central government needs such assets to profit from and become the world’s biggest global investor.
Analysts are speculating that a rise in China’s global influence will also lead to greater investment in their domestic infrastructure.
The immense foreign exchange holdings are just one of many signs of China’s spectacular rise, and its growing influence in the global economy and financial markets.
And with that growth has come rising costs at home for education, health care and pensions. Earning more on government holdings, analysts say, would allow the government to better cope with some of these problems.
Why should China increase its investment in their domestic infrastructure? To quell social discontent, to discourage opposition, and to improve its image as the good guy among allies that may want to do business with them.
Analysts are suspecting that the central government is using the creation of this agency to stop investing in US dola US treasury securities, which until now hold much of its currency reserves.
Nonetheless, the central government has denied any of this. They say that they are only taking further steps to securing their economy’s peaceful rise. Experts have analyzed how the removal of reserves from US treasury securities may highly impact the US economy. With a removal of China’s reserves, analysts are forecasting an increase in American interest rates. China’s central government has also denied this as their aim for creating the agency.
With greater control over its economy’s regulatory and legal aspect, China will increase its image as a stronger financial and trade ally. Thus, increasing its possibility for greater global influence and economic expansion.
[...] China will invest currency reserves [...]