An outline of the company has already been drawn up by a working group of government advisers who visited Singapore recently on a fact-finding mission.

Under the proposal, the firm will raise capital by issuing yuan-denominated bonds, using the proceeds to buy foreign exchange from the central bank which will then be invested in offshore fixed-income and equity markets, property and direct equity stakes in companies, but not directly in commodities, sources said.

It is most likely to work alongside Central Huijin Investments, which was established in December 2003 to recapitalise teetering mainland banks and other financial institutions with foreign exchange reserves, and the State Administration of Foreign Exchange, which implements currency policy.

But it can also be formed through a reorganisation of Central Huijin, the sources said.

'[The establishment of such a company] will almost certainly happen because by our calculation China needs no more than US$360 billion of foreign reserves by the usual definition, that is for the emergency needs of external liquidity,' Credit Suisse chief regional economist Tao Dong said.

The country now has the world's largest stockpile of foreign currency, having surpassed Japan's earlier this year and exceeding US$1 trillion by the end of October, more than five times the US$165.6 billion reached at the end of 2000.

The reserves have been growing at an accelerated US$18.8 billion a month on average this year, thanks to the country's widening trade surplus and steady foreign direct investment that is expected to reach US$60 billion for the third consecutive year.

'The reality is China will run a trade surplus for a while regardless of policy,' HSBC chief China economist Qu Hongbin said. 'China must find a new channel to recycle the inflows into the overseas market instead of just relying on central bank reserve purchases to recycle these dollars.'

The final decision on whether to base the company on Temasek - whose expanding portfolio includes large stakes in a Thai telecommunications firm, Indian and mainland banks and Indonesian infrastructure - probably will be made at a central government financial meeting to be chaired by Premier Wen Jiabao in February next year. The Central Finance Working Committee meeting is a rare event that is expected to establish China's economic direction for years to come.

If the new investment company is established, it may not be formally announced by the government and its investment strategy and operations almost certainly will be kept secret.

'I would not recommend formally establishing a big company like that because whatever it buys will become pricier,' said China International Capital Corp chief economist Ha Jiming. 'There are things you can say and you don't have to do but there are also things you cannot say but you just do them.'