At the weekend, Premier Wen Jiabao said China 'must actively explore and broaden the channels and manner of using [its] foreign exchange reserves'. His words were enough to send either an icy chill or a tremor of excitement down the spines of listeners around the world. With US$1.066 trillion in the kitty at the end of December last year, China's State Administration of Foreign Exchange ranks alongside the likes of UBS or Fidelity as one of the world's elite handful of trillion-dollar-plus asset managers. Even a small shift in its allocations is big news for global financial markets and economies. In one way, Mr Wen's statement was simply a pledge to continue existing policy. This time last year, SAFE boss Hu Xiaolin promised 'to improve the currency structure and asset structure of our reserves' and to boost their yields. But Mr Wen's words following the conclusion of China's five-yearly financial work meeting were far more significant than Ms Hu's undertaking last year. For one thing, China's foreign reserves are about US$247 billion bigger now than they were then. That is roughly equivalent to adding 1.3 times the entire gross domestic product of Hong Kong in just 12 months. As a result, any change of allocation policy will have a correspondingly bigger effect. More important, however, is the identity of the speaker. That it is the premier himself who is now speaking on the importance of better deploying China's foreign exchange reserves means it is far more likely a major policy shift is in the works. Until now, China's vast holdings of foreign exchange have been managed ultra-conservatively. Analysts assume that most of SAFE's assets - 70 per cent to 75 per cent - are denominated in US dollars, with the bulk of the rest in euros. It is likely that almost all are held in highly liquid US or European government bonds or debt issued by government-linked agencies. Sure, SAFE has tapped its reserves to inject almost US$70 billion worth of fresh capital into China's ailing state financial institutions, including a US$4 billion bailout for China Reinsurance Group announced yesterday. A further US$25 billion or so is likely to be injected into Agricultural Bank of China some time this year. But the underlying assets are still assumed to be in government debt and still on the central bank's books, although no longer counted as part of the official reserves. In contrast, Mr Wen's declaration raises the prospect of a far more daring use of China's reserves in the future. If enhanced yields are Beijing's main objective, one option would be to farm out some of the money to private-sector managers. At most, China needs only about US$600 billion of liquid reserves to cover six months' worth of import bills together with its short-term foreign debt. Part of the remainder could be allocated to international asset managers - such as UBS or Fidelity - to invest in global equity, debt, commodity or property markets in hope of earning better returns. Such investments could have a significant impact on financial markets but would be relatively uncontroversial. China, however, is more likely to put some of its cash pile to work to earn political and monetary dividends. Some observers believe that Beijing is close to setting up a US$200 billion state investment agency to project Chinese policy internationally by making longer-term asset purchases around the world. The first targets are likely to be mines, plantations and oil and gas fields in resource-rich countries in Africa, Asia and Latin America. Such investments will be aimed at cementing political alliances and securing long-term supplies of energy and raw materials for China's resource-hungry industries, as well as at making profits. In the longer run, observers suggest, the fund could also begin acquiring property or taking private equity stakes in promising companies in developed and developing economies. Such an investment agency, inevitably, would be extremely controversial, especially in the United States and Europe. Its effect would not only be to diversify China's foreign exchange reserves but considerably to magnify China's political and economic influence around the world.