China to appoint new investment arm chief

[HenryTo]

China set to diversify out of U.S. Treasuries and into other global asset classes, including equities:
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China to appoint new investment arm chief-sources
Mon Feb 26, 2007 4:47 AM ET

(Adds quotes, information on Huijin investments, analysis)

By George Chen and Eadie Chen

SHANGHAI/BEIJING, Feb 26 (Reuters) - China is set to name a new head of the investment arm of the central bank, as it prepares to launch a new agency to help manage the country's foreign currency reserves of more than $1 trillion.

Financial sources close to the State Council, China's cabinet, told Reuters on Monday that Vice Finance Minister Lou Jiwei was likely to replace Hu Xiaolian as chairman of Central SAFE Investment Ltd., also known as Central Huijin.

Hu would remain in charge of the State Administration of Foreign Exchange (SAFE), China's foreign exchange regulator, which currently manages the reserves, the sources said.

They said Lou's appointment could be a stepping stone to his becoming head of a new agency the government is expected to set up to manage part of the foreign currency reserves more actively.

The agency, which could be named the State Foreign Exchange Investment Corp., would focus on investing globally, helping Beijing earn higher returns on its foreign currency reserves.

Under the proposed plan for the agency, Central Huijin would transfer some of its assets to the new body, which would report directly to the cabinet.

Central Huijin declined to comment, while the Ministry of Finance said it could not make an immediate comment.

The cabinet has agreed in principle on Lou's appointment to Central Huijin. The issue will be discussed further during the annual session of the National People's Congress, China's parliament, which starts on Monday, the sources said.

An official announcement could be made after the congress, they said.

If the plan is approved, Lou, a vice finance minister since 1998, would become the first official from outside SAFE to lead Central Huijin. The body's current chief executive, Xie Ping, would remain in the post, the sources said.

"With such an appointment outside SAFE, the government wants to boost Huijin's efficiency, making it a real company," said a source familiar with the situation.

Central Huijin was established in 2003 to oversee the injection of billions of dollars of foreign currency reserves into troubled banks and brokerages as a prelude to their public listings on stock markets.

SHAREHOLDER IN BIG CHINESE BANKS

In its first injections, Central Huijin ploughed $45 billion into Bank of China <3988.HK><601988.SS> and China Construction Bank <0939.HK> at the end of 2003.

Its activities have made it a top shareholder in many big Chinese banks in which foreign institutions, such as Royal Bank of Scotland <RBS.L> and Bank of America <BAC.N>, also own stakes.

The sources said top financial regulators had submitted a proposal to the cabinet to set up the new foreign reserves management agency separately from Central Huijin, and that Lou would lead implementation of this plan jointly with central bank governor Zhou Xiaochuan.

"If everything progresses smoothly, the new agency will be set up by the end of June," said a financial source in Beijing.

Central Huijin would mainly invest at home, focusing on major financial institutions and central government-led state enterprises that needed to be restructured.

Heading the foreign reserves management agency could make Lou, 56, a veteran economic official with a domestic master's degree in economometrics but little direct experience of foreign markets, into one of the most powerful figures in the global financial world.

He could face big challenges in hiring expert staff, creating a risk-taking culture and globally competitive pay scales in the new agency, and giving fund managers freedom to be effective without surrendering too much of Beijing's control.

"No doubt Mr. Lou is an able operator in the Beijing system. But who will manage these funds strategically or tactically on a day-to-day basis?" Donald Straszheim, vice chairman at U.S. firm Roth Capital Partners, wrote in a research note.