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China: Investment won't hurt dollar
2007-03-17
China's prime minister tried to reassure the world about its financial goals Friday, saying a planned company to invest some of its $1 trillion in reserves won't affect dollar-denominated assets and promising to reform unruly Chinese stock markets. At a news conference, Premier Wen Jiabao didn't answer directly when asked what the new company will invest in. But he appeared to be trying to squelch suggestions it might roil markets by diverting money that Beijing now stockpiles largely in U.S. Treasuries. "I can assure you that by instituting such a foreign exchange company, it will not have an impact on U.S. dollar-denominated assets," Wen said. Wen also promised to make China's stock markets more "open, fair and transparent" and to improve regulation. His comments came two weeks after a fall in Chinese stock markets sparked a global sell-off, but the premier didn't mention that turmoil. Wen's comments reflected official efforts to assure foreign nations and China's public that communist leaders have economic and social challenges under control and that its growing presence in world markets is a positive force. "I think they really have to reassure people continuously," said Robert Broadfoot, managing director of the consulting firm Political and Economic Risk Consultancy Ltd. "There is a high probability that China is a factor that leads to more volatile financial markets." The announcement last week that China is creating the investment company came as Beijing faces U.S. criticism over its trade surplus, which reached $232.5 billion with the U.S. last year, and complaints that Chinese demand for oil and other resources is pushing up world prices. The government says it wants to make more profitable use of its reserves, up to 70 percent of which are thought to be in safe but low-yield Treasuries and other U.S. dollar-denominated assets. Much of the rest is believed to be invested in euros and a small amount in yen. The growth in China's reserves has been driven by its surging exports, which is bringing in a flood of foreign currency. That's forcing the central bank to drain billions of dollars a month from the economy by selling bonds to reduce pressure for prices to rise. The reserves are growing by about $20 billion a month. "How to properly use such a huge amount of foreign reserves has become a new problem facing us," Wen said. As to stock market reforms, the premier said Beijing wants to create "mature capital markets" to finance economic growth. "We also need to encourage and do a good job in the timely disclosure of information in the stock market," Wen said. The premier didn't mention the turmoil of Feb. 27, when a 9 percent drop in the Shanghai stock index set off shock waves that dragged down markets in New York, Hong Kong, London and elsewhere. China's stock markets have grown rapidly, but are subject to wild price swings and accusations of insider trading and other abuses. Most traded companies are state-owned, and economists say market performance has little connection to China overall economic health. The government has released no details on when the investment company will be set up or how it will operate. China's finance minister, Jin Renqing, last week cited Singapore's Temasek Holdings as a possible model. Temasek manages 129 billion Singapore dollars ($89 billion) in government assets and owns stakes in companies in Singapore, India, China and elsewhere. Analysts say the investment company, reporting directly to China's cabinet, would manage as much as $200 billion to 400 billion, making it one of the world's richest investment funds. Beijing is expected to move gradually due to its lack of experience and the need to find suitable investments for such huge sums. The company will have to cope with political obstacles stemming from its government ties, said Broadfoot. He pointed to Temasek's experience in Thailand, where it is embroiled in controversy over its purchase of a controlling stake in a telecoms firm, and state-owned Chinese oil company CNOOC Ltd., which dropped a bid to buy U.S. oil and gas producer Unocal Corp. after criticism by American politicians. "The controversies will come when they get this body and it tries to behave like a private financial institution but one that is government-owned," Broadfoot said. "Its reception could be cool in a lot of the places that it tries to do business."
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