Monday, April 25, 2011

Peoples Bank of China to Deploy Foreign Exchange Reserves into Resource/Commodity Funds

Holy crap!
From the Wall Street Journal:
China's central bank is planning to set up a variety of new funds that will make use of the country's massive foreign-exchange reserves, including special-purpose investment funds and a foreign-exchange stabilization fund dedicated to forex interventions, a local news website reported Monday, citing unnamed sources.

"Relevant authorities" are studying a proposal by the People's Bank of China to create funds using some of the forex assets from the PBOC's balance sheet that could invest in sectors such as energy and precious metals, as well as a fund that will allow the central bank to influence foreign-exchange rates, Caixin Media said, citing a source close to the PBOC. 

The source said the funds would be loosely modeled on the Norwegian sovereign wealth fund commonly referred to as the Petroleum Fund, which uses the country's oil profits to insulate the economy from price fluctuations, the report said.

China's forex reserves are the largest in the world, totaling $3.0447 trillion at the end of March, up from $2.8473 trillion at the end of 2010, according to the PBOC.

Various academics and policymakers in China have frequently proposed that the country direct more of its foreign-exchange reserves into resources and commodities, but others, such as People's Bank of China Vice Gov. Yi Gang, have countered that it would be difficult to do so without significantly increasing the market prices of those goods. 
The proposed forex stabilization fund would allow the PBOC to buy foreign currency directly on the market without having to print new currency notes, the report said, citing people familiar with China's monetary policy....MORE