China’s multibillion dollar question

By Richard McGregor in Beijing

With a vaguely worded statement from Wen Jiabao, China’s premier, at the close of a weekend meeting in Beijing on finance policy, the die has been cast for a momentous change in the management of the country’s massive foreign exchange reserves.

Mr Wen said the management of the reserves, the world’s largest at more than a thousand billion dollars, should be improved and the channels through which they are invested diversified.

Such remarks might seem to be little more than common sense but, against the backdrop of an intense, yearlong debate in China about how to use the money, Mr Wen’s remarks represent a decisive policy shift.

Everyone from senior leaders to local policy entrepreneurs has been floating ideas about how to use the money, ranging from funding education and health systems to buying foreign oil and stocks. Such policy proposals can now be put forward for possible adoption.

Once a plan has been implemented, in five to 10 years, Beijing could preside over one of the world’s largest and most powerful investment agencies.

The debate thus far has irritated some economic policymakers who testily point out that the reserves cannot simply be spent as they represent assets on the central bank’s balance sheet.

The government, or some agency under its control, would have to account for the funds in some fashion, perhaps through the issuance of bonds to the People’s Bank of China.

But the PBoC has already used $60bn (