http://online.wsj.com/public/article/SB117401978804139227-w6SMNhb512jL4Nkh0A4eJWgor_E_20070323.html?mod=regionallinks
BEIJING -- As China's influence comes to be felt more strongly in global markets, the country's leadership is feeling the need to reassure the world that its decisions won't upend the international financial order.
A sharp fall in the Shanghai stock market last month spooked overseas investors and contributed to recent turmoil in the U.S. and other stock markets. China's specter also has been hovering over the U.S. government-bond market, where China is the second-largest foreign investor after Japan.
Now that China's government has confirmed plans to set up a company to manage a portion of its $1.07 trillion in official foreign-exchange reserves, analysts expect it to buy fewer Treasury bonds and more risky investments, possibly shifting market prices.
As a result, Premier Wen Jiabao spent much of his annual news conference Friday explaining that his administration is striving to resolve structural problems in China's economy, overhaul the nation's stock markets and diversify its foreign investments in ways that aren't disruptive to the rest of the world.
"I know the question you are asking is whether our establishing this company to develop outward investment will affect U.S. dollar assets," Mr. Wen told the news conference. Noting that investments denominated in U.S. dollars account for the majority of China's holdings, he said: "China's purchases of U.S. dollar assets are mutually beneficial. China's formation of an investment company for its foreign-exchange reserves will not affect U.S. dollar assets."
He was speaking at the close of the annual session of China's legislature, which Friday passed two pieces of landmark legislation. One gives private-property rights stronger backing; another unifies corporate tax rates, putting domestic and foreign companies on an equal footing.
Mr. Wen said the goal of the new agency will be to "preserve and increase" the value of China's foreign-exchange holdings, which have grown as the nation's huge export shipments brought in dollars, and suggested it would take a conservative approach. "China's diversification of its foreign-exchange reserves is based on considerations of the safety of that foreign exchange," he said, without giving details.
In his public remarks about the new strategy for handling foreign-exchange reserves, Mr. Wen has consistently mentioned only the financial goal of increasing returns. While some Chinese scholars and officials have suggested the funds should be used for strategic purposes, such as buying reserves of natural resources or foreign companies with valuable technologies, officials haven't said the agency will pursue such a course.
"China has been investing abroad for only a short time, and we definitely lack experience," Mr. Wen said at the news conference. "Now that our foreign reserves have grown to surpass one trillion [U.S. dollars], how can we best make use of them? This has become a new and difficult question for us."
Mr. Wen said his government will continue to press ahead with such market-oriented economic changes, while also trying to improve education, health care and justice in order to better the lot of the "vulnerable" ordinary Chinese who haven't shared in the benefits of the rapid growth in the world's fourth-largest economy. He also spoke of the need for changes to combat corruption, one of the biggest public complaints against the government.
Mr. Wen didn't comment directly on the recent movements in China's stock market, saying his focus is on building market infrastructure and institutions.
