When a group of high-ranking finance officials confirmed earlier this month that the Chinese Government would set up an investment arm to properly handle the country's staggering volume of foreign exchange reserves, Lou Jiwei, the newly appointed Vice Secretary-General of the State Council, China's cabinet, proved a popular choice to lead the new agency.

The 56-year-old Lou, who served as vice minister of finance between April 1998 and this March, is widely regarded as a high-ranking scholar-official specializing in finance and economics.

According to Finance Minister Jin Renqing, the incoming state investment agency is expected to be modeled after Temasek Holdings owned by the Singaporean Government. Over the years, Temasek has made strategic investments in a number of local and foreign companies.

Figures released by the People's Bank of China, the central bank that oversees China's foreign exchange reserves, indicated a necessity to diversify its investment and disperse rising inflows of trade surplus. By the end of 2006, its total stockpiles reportedly hit $1.07 trillion, the world's largest.

Previously, an overwhelmingly majority of China's foreign exchange reserves were used to buy U.S. Treasury bonds, making China the second largest world creditor of the U.S. Government. However, as the yuan keeps strengthening, it causes increasing losses to China.

During this year's full session of the National People's Congress, China's top legislature, Premier Wen Jiabao addressed the issue in his government work report, saying that China will "actively explore and develop channels and means for appropriate use of state foreign exchange reserves."

Authoritative sources said that Lou's agency would buy the reserves from the central bank via the issuance of yuan-denominated bonds estimated at $200-250 billion, a move to transfer this portion of money for more profitable investments.

The major concern would be how Lou will manage the huge funds to best maintain China's GDP growth, curb the excessive trade surplus increase, ease currency appreciation pressure, as well as improve investment returns. It is initially agreed that such strategic projects focus on energy resources, hi-tech development, coal and oil industries that could possibly be the best choices for China's mammoth currency reserves.