THE government is setting up a new investment agency to seek higher returns on its foreign currency reserves of more than US$1 trillion, the largest stockpile in the world, Finance Minister Jin Renqing said Friday.

It was the first official confirmation of China’s plans, which Premier Wen Jiabao foreshadowed in January by saying the government would actively explore new ways of using the reserves.

“The biggest priority is safety and under the principle of security we will try to increase the efficiency of management and the investments’ returns,” Jin told a news conference in Beijing.

He gave no details of how much money the fund would manage, let alone how it might invest. But he said Singapore’s state-owned Temasek investment company would be one of its models.

“This company is still in the process of being formed and it will let the public know when it has been formally set up,” said Jin, who was speaking during the annual session of the National People’s Congress.

China’s financial firepower means the fund has the potential over time to make a big impact on world markets.

“Some people in the market are concerned that if there is going to be a drastic change in the way the foreign exchange reserves are being managed, it could have a potentially important impact on capital flows and financial markets,” said Grace Ng, an economist at JPMorgan Chase in Hong Kong.

Academic studies estimate that investment by China and other Asian countries in U.S. bonds has reduced long-term American interest rates by anything from half a percentage point to 2 percentage points, a boon to U.S. businesses and home buyers.

The State Administration of Foreign Exchange (SAFE), an arm of the central bank, currently manages all of China’s reserves.

Where they are invested is a State secret, but bankers assume two-thirds or more are held in low-risk U.S. dollar bonds.

SAFE, which regulates China’s currency, would continue to manage what Jin called China’s “normal” reserves. The rest would be invested by the new agency.

As China’s reserves have ballooned on the back of record trade surpluses, demands have grown for part of the hoard to be managed more aggressively.

Some researchers have argued for buying oil, natural resources and high-technology imports. Others want the money to be converted back into yuan and spent relieving poverty at home.

Cheng Siwei, a leading lawmaker, said that the government needed no more than US$600-US$700 billion in reserves and various domestic media reports have said the new agency could receive as much as US$200 billion to manage.

Bankers, however, say a fund would take years to grow that big without driving the prices of assets it buys sharply higher.

To avoid rocking markets, one possibility for the new agency would to give it only part of China’s new reserves, not its existing stash. The reserves are growing by about US$20 billion a month.

(SD-Agencies)