China has approved the establishment of the State Foreign Exchange Investment Company, a new ministry-level group, to manage the country's US$1.06 trillion foreign exchange reserves, according to the 21st Century Business Herald.

 

The new company will be transformed from Central Huijin Investment Co Ltd, an investment arm of the central bank. It will be comprised of several sections dealing with businesses in different segments of the financial sector, such as banking, insurance, securities, and forex investment.

 

The proposal for such a form of forex manager was brought to the table of the Third National Financial Work Conference held last month and approved before the week-long Spring Festival, which ended last Saturday.

 

The passage of the proposal has ended a year-long debate over how the country should adapt itself institutionally to better manage its bulging forex reserves. Previously there had been two mainstream opinions among government officials, academics, financial professionals and all other experts.

 

One side suggested setting up an independent financial state asset administrator, similar to the State-owned Assets Supervision and Administration Commission. In this approach, Central Huijin could be an affiliate company to the new financial state asset manager, among other financial holdings companies under the same umbrella. Or, it could remain under the State Administration of Foreign Exchange, with the new financial state asset administration to manage assets not held by Central Huijin.

 

The other group preferred a more commercialized scenario, suggesting the transformation of Central Huijing to a shareholding company to manage all state-owned financial assets. The State Council and the Ministry of Finance could be involved in the management of Central Huijin by sending nominees to its board of directors.

 

The approval of the State Foreign Exchange Investment Company has in fact avoided favoring or rejecting either of the two sides. Once established, the company may follow the development pattern of Temasek Holdings, the Singapore state-held financial holdings, which has been regarded as one of the best performing government-controlled enterprises in the world.

 

(China Daily March 2, 2007)