Investing a nation's wealth wisely(4)

About 49.2 percent of equity purchases have been from the US markets, compared with 27.8 percent in other advanced economies and 23 percent in emerging markets, the CIC annual report said. In addition the CIC has invested 22.3 percent of its fund in the overseas financial sector, while 11.6 percent is in the information technology sector and 10.7 percent in the consumer discretionary industry, it said.

Guo Tianyong, a professor at the Beijing-based Central University of Finance and Economics, says the CIC must maintain "long-term investment" and diversify risks for long-term gains. "The fund should also emphasize on talent retention and cultivation because it would help in sound growth of foreign exchange reserves," Guo says.

Although there have been some reports that the Chinese central bank and the State Administration of Foreign Exchange (SAFE) are planning to create a new institution for using the forex reserves for investments, so far, neither the central bank nor the CIC has given any such indications, experts say.

In January, SAFE launched a special office to invest foreign exchange reserves overseas in terms of entrusted loans. Most of the borrowers of such loans are enterprises that are planning overseas expansion.

"CIC faces competition from SAFE, which is also investing in equities, private equity, real estate and infrastructure to diversify China's foreign exchange reserves," says Barbary of Sovereign Wealth in London.

"Ideally, there wouldn't be two different funds attempting to fulfill the same role and an ongoing funding stream would be designated to the single fund. In that way, China might develop a fund like the Government of Singapore Investment Corp. However, given the circumstances, an endowment model is a good option for the CIC," she says.

By the end of 2012, China's total foreign exchange reserves reached $3.31 trillion. About 60 to 70 percent are dollar assets. According to the US Treasury Department, China's holdings of US Treasury bonds increased by $25.2 billion in May and the total reached a record high of $1.315 trillion. It rose by $151.9 billion from a year earlier.

Xu Hongcai, a senior financial researcher at the China Center for International Economic Exchange, a government think tank, feel that it is imperative for the CIC to diversify its investments in US Treasury bonds.

"A better choice is to invest in overseas infrastructure projects and support overseas moves of Chinese enterprises," he says.