Sept. 29 (Bloomberg) -- China Investment Corp., the nation's $200 billion sovereign wealth fund, starts operations today as the government seeks to boost returns on the world's biggest foreign-exchange reserves.

The investment agency will come under the direct supervision of the nation's cabinet, the State Council. Lou Jiwei, former vice finance minister, will act as director and Gao Xiqing, former deputy chairman at the National Council for Social Security Fund, will be general manager, according to information disclosed at an opening ceremony in Beijing.

China set up Asia's biggest state-owned investment company after surging trade surpluses helped push the nation's currency reserves to a record $1.33 trillion. The agency's creation has spurred speculation of a flood of Chinese investments into overseas companies and resources such as oil and metals.

``Such a company is very necessary in the context of China's increasing trade surplus and trade frictions with other countries,'' said Li Yang, who heads financial research at the Chinese Academy of Social Science in Beijing. ``China needs to shift its exports from manufactured goods to capital, and also from the old model of relying on foreign investments for growth.''

The new fund made its first investment with the $3 billion purchase of a stake in Blackstone Group LP in May, suffering a loss as the New York-based private equity firm's stock dropped 19 percent since listing on June 22.

Investment Strategy

China's government hasn't disclosed in detail an investment strategy for the agency, to be funded by a total of 1.55 trillion yuan ($205 billion) special government bond sale that will be used to buy foreign-exchange reserves from the central bank. By Sept. 28, 700 billion yuan has been raised by 10-year and 15-year bonds issues. The finance ministry will sell more long-term bonds by the year-end to meet the budget.

The company ``will be prudent in its foreign exchange business, keeping in mind tolerable risks while also aiming to maximize investment returns in the longer term,'' it said in a statement handed out today before the opening ceremony.

Fred Hu, a managing director at Goldman Sachs Group Inc. in Hong Kong, said the company should hold a global portfolio, including stocks, bonds, commodities and special assets in private equity, real-estate and hedge funds, according to a report in the official China Securities Journal on Sept. 10.

The company may also help major state-owned companies expand overseas, the Shanghai Securities News reported, citing Li Rongrong, director of the China State Asset Management Commission, the agency that oversees government assets.

Safety First

The sovereign fund should be cautious in the beginning and put safety before seeking high returns, said Li Yang at the Social Science Academy, who had been an invited advisor for the set-up of the company.

``The two agencies charged with investing China's currency reserves need to coordinate to prevent potential conflicts,'' Li said. China has been partly outsourcing its reserves investments since 1998 to international investment firms, and will continue to do so after the new company starts, according to Li.

Hu Huaibang will be in charge of supervising internal audits, the company statement said.

The State Administration of Foreign Exchange, a regulatory branch under the central bank, is still managing most of the nation's foreign currency reserves, which are largely invested in low-risk assets such as U.S. government debt.

Bigger Than Temasek

China owns $405 billion, or 18 percent, of foreign-held U.S. Treasuries, the second-biggest amount in the world after Japan.

The reserves management firm's assets will exceed those of Singapore's Temasek Holdings Pte, which had $107 billion under management as of March. Norway runs a $327 billion global pension fund to preserve the country's oil wealth for future generations.

The new company incorporates the former investment arm of the central bank, Central Huijin Investment Co., which holds controlling stakes in the nation's four biggest Chinese banks.

Central Huijin has injected $60 billion of its foreign reserves to boost the capital of Industrial & Commercial Bank of China, Bank of China Co. Ltd and China Construction Bank Corp. since January 2004. The Agricultural Bank of China, the only state-owned bank not to sell shares to the public, may receive a $40 billion capital injection from Huijin, China's official Xinhua News Agency reported in August.

``The new investment company will continue to boost the capital of state-owned financial institutions,'' said director Lou Jiwei at the ceremony.

To contact the reporter on this story: Belinda Cao in Beijing at lcao4@bloomberg.net

Last Updated: September 29, 2007 02:09 EDT