February trade figures released not long ago may upset China, as the surging trade surplus, reaching $23.76 billion in February, not only frustrates China's efforts in curbing it, but also expands the country's already huge foreign exchange (forex) reserve.

China has become the world's largest holder of of forex reserve, which had reached $1.066 trillion by the end of 2006, and is still swelling by about $20 billion monthly mainly fueled by the trade surplus.

"The proper use of such a huge amount of foreign exchange reserve has become a new problem to us," said Premier Wen Jiabao at a press conference on March 16 to close the annual session of the National People's Congress (NPC).

During this year's NPC, several top financial officials acknowledged that a new state investment agency would soon come into being to manage a portion of the $1.066 billion in forex reserve.

At the press conference, Premier Wen reconfirmed that "China is preparing for the establishment of a foreign exchange investment company, which will not be affiliated to any government department or institution. The company, which will be subject to supervision, is aimed at operating the investment in line with state laws to preserve and increase the value of foreign exchange reserve."

With such hefty reserves, China's decision on setting up a company to pursue higher investment return on a part of the reserves calls worldwide close attention.

A brand-new agency

This state investment company should be born soon, but the government hasn't yet shed light on the timetable of its birth, its structure, the proportion of the reserves under its management, and in what and where it should invest.

During the NPC session, Finance Minister Jin Renqing said the State Council had decided to divide the country's forex reserves into two parts----"normal" reserves and money to be used for investment seeking "more profits."

Economists estimate that 20-25 percent of the reserves may be managed by the company.

Jin also mentioned that the agency will draw on international experience, such as Temasek Holdings owned by the Singaporean Government. Temasek has made strategic investments in a number of local and foreign companies in the telecommunications, property, financial services and pharmaceutical industries.

According to a report of Shanghai Securities News, authoritative sources said the new investment agency would issue yuan-denominated bonds worth $200 billion to $250 billion. Money to be raised will be firstly used as strategic investment for energy enterprises like China National Offshore Oil Corp.

Zhong Wei, Director of Finance Research Center of Beijing Normal University, also suggested China's new agency invest in the overseas market, but not solely in financial assets. In Zhong's view, as reserves in the State Administration of Foreign Exchange are mainly invested in financial assets, the new investment company should invest in non-financial assets. Thus, the impact on the international financial market won't be as great as some believe.