China to Open Investment Trust

Due to China's huge current account surplus there stock of foreign currency reserves continues to mount. Jin Renqing a Chinese Minister recently announced plans to create a special agency to look into the best way to invest their $1,000 bn foreign currency reserves.

Upto now the Chinese have invested a significant % in United States Treasury bonds. This is seen as a low risk investment strategy. However for various reasons the Chinese are likely to diversify their investments. For example they could take holdings in companies around the world. In particular they are likely to invest in commodity producers. Chinese rapid growth is causing the demand and price of commodities to rise. In the long term this will give China greater political sway over other countries who benefit from their investment. Up to now the Chinese have taken an inward looking approach to world affairs. But this could change as they increasingly flex their economic muscles.

If the China loose their appetite for low interest bearing dollars it could mean that US interest rates will have to rise, to attract other investors. It will also make it difficult to finance the current account deficit. Therefore the dollar is likely to fall further.

However the Chinese own so many dollar assets they have a vested interest in preventing a significant fall in the dollar. With nearly $1 trillion to invest they are likely to continue buying bonds.

See also: Why US dollar likely to depreciate

source: China to open fund for investment at NY Times