China: Trillion Dollar Investment Blues

As China’s foreign exchange reserves continue their explosive growth, questions about the ways the country’s financial mandarins manage its pool of wealth are growing both inside and outside China.

Most of China’s currency reserves are invested in U.S. dollar-denominated debt, such as U.S. treasuries, earning a low but steady return. Some in Washington and world markets fear that China might decide to suddenly dump its dollar holdings, setting off a tidal wave of sales and imperiling the U.S. economy.
But while sounding calm on the country’s investment moves, Chinese leaders face domestic concerns that the reserves, believed to be invested for the bigger part in those low-risk, low-return U.S. treasuries, are not used more productively to deliver benefits for China.

“China is a big developing country with a huge population but inadequate resources,” says Liu Yuhui, an expert at the Finance Research Institute under the Chinese Academy of Social Sciences. “Acquiring oil fields, mines and even arable land could all become viable channels for investing the available funds to help sustain the country’s development.”

IPS