The company, to be officially launched in September, will focus on overseas industrial and financial investment. Special bonds issued by the Ministry of Finance will serve as the major source of capital for the company.

Lou Gang believes that strategic assets will become the company's major investment targets, including energy, raw materials, financial services, and IT and capital goods.

But he stated the main goal of such investment is to divert risk, not to make a profit. For instance, the company will buy resource-oriented companies but not to control them, which will hedge financial risks. This means that if the company holds stocks in iron ore companies, it can hedge risks generated by iron ore price hikes.

Additionally, on July 1 China readjusted export tax rebates on 2,831 exporting goods, accounting for 37 percent of all exported items. While adding to the export cost of related companies, this measure will help reduce the rapid increase of exports and ease the tension of liquidity.

Money supply woes

Excessive liquidity is reflected by two factors: a fast-growing money supply and excessive capital in the commercial banking system.

The latest central bank figures show that by the end of this June, the balance of broad money supply (M2) was 37.78 trillion yuan, growing 17.06 percent compared with the same time last year. The balance of narrow money supply (M1) was 13.58 trillion yuan, up 20.92 percent. The balance of circulating money (M0) was 2.69 trillion yuan, up 14.54 percent.

Theoretically, excessive liquidity means that the central bank has expanded the money supply, resulting in more money chasing fewer commodities.

In the past two years, the prices of gold, crude oil, copper, etc. have kept climbing up. The price hikes of pork, grain and egg have pushed the consumer price index (CPI) to record highs. In addition, the five major power groups are requesting that electricity prices be raised.

According to the State Bureau of Statistics, in the first half of this year, the CPI increased 3.2 percent compared with the same period last year, and the year-on-year growth hit 5.6 percent in July, the highest in a decade.

Faced with the potential of serious inflation, on July 21 the central bank decided to raise the interest rate for the third time this year. Not long afterwards, the central bank announced the rise in the reserve requirement ration.

Song Guoqing, economics professor with the China Center for Economic Research at Peking University, said the frequent use of economic levers is meant to reduce excessive liquidity and curb bank loans.

However, Peng Xingyun, an economist with the Chinese Academy of Social Sciences, argues that the interest rate hike will not ease excessive liquidity, but on the contrary, it could create more liquidity problems.

After the three interest rate hikes, the benchmark one-year interest rate has reached 3.33 percent. Taking out 5 percent for the interest tax, the real interest rate is around 3.16 percent. However, growth of the CPI in July still means there is an actual negative interest rate. Because of these factors, buying property and stocks is still more favorable than putting money into banks.

Bank savings blues

For a long time, the Chinese favored putting their money into savings accounts. Now, however, since the rate of return is so low to negative for savings in banks, that a huge amount of money is being invested in real estate and in the stock market.

Central bank statistics show that by the end of June, the bank deposit balance had stood at 36.94 trillion yuan and the bank loan balance 25.08 trillion yuan, resulting in a 11.86 trillion yuan gap. In 2001, however, the gap was only 3 trillion yuan with a deposit balance of 14.3 trillion yuan and a loan balance of 11.2 trillion yuan.

The increasing gap between deposits and loans means that a huge amount of capital is left unused and that the capital is actively trying to find a way out. Thus, growing bank loans drive investment, further pressurizing an overheating economy.

Judging by the central bank's figures, bank loans are mainly invested in the property market.

Although China has taken many measures to rein in the real estate market, property prices in major cities continue to surge. NBS figures show that in June, property costs in 70 major Chinese cities increased 7.1 percent compared with the same period last year. In some cities like Beijing, Beihai, Nanjing and Shenzhen housing prices rose over 10 percent.

Moreover, the negative interest rate makes bank savings less attractive. The second quarter survey from the central bank shows that buying stocks and funds has surpassed bank deposits to become the Chinese people's top two financial choices. More money has been diverted from banks to the property and stock markets.

It will take the government more time to solve the liquidity problem. Tang Shuangning, Vice Chairman of China Banking Regulatory Committee, said the key to settle the liquidity problem was to divert the money into rural construction, into small and medium-sized enterprises, into the cultural industry, into social security projects, and into places where the capital is needed most.