BEIJING, Feb 11, 2007 (AFP) - China will send ripples through the financial world when it unleashes an investment company with more money under management than any mutual fund in existence, analysts said.

   The State Foreign Exchange Investment Company, which could be formed within just months, is expected to be in charge of 210 billion dollars, or one fifth the nation's enormous foreign exchange reserves, they said.

   "A company like that will definitely have an impact on global markets," said Zhang Ming, a Beijing-based economist with the Chinese Academy of Social Sciences.

   "Other investors will be following it closely and try and guess its next move. They'll buy assets that the company is likely to buy, and withdraw from markets if that's what they believe the company will do," he said.

   The State Foreign Exchange Investment Company is expected to spend its money on a wide array of investment targets at home and abroad, from oil and gas to financial assets and entire companies, analysts said.

   It will get its huge bag of money as part of a plan to divide China's 1.07 trillion dollars of reserves into three portions, the respected Southern Weekly paper said recently.

   Another 100 billion dollars from the reserves will be allocated to Central Huijin, a government investment arm, while 700 billion dollars will stay under management by the State Administration of Foreign Exchange, the paper said.

   That arrangement will put the State Foreign Exchange Investment Company in charge of more money than the approximately 160 billion dollars of assets controlled by the Growth Fund of America, the world's largest mutual fund.

   "In the long term, the company should become a national reserve asset management company, which should be able to earn returns higher than those from US Treasury bonds," said Zhou Jiangong, a Shanghai-based economic analyst.

   In finance, the ideal portfolio offers high yields combined with low risk, but the problem is China's forex portfolio increasingly looks like the exact opposite.

   It earns a relatively meagre return on its US Treasury bonds, and still has to contemplate the awful and very real risk of a plunging US dollar.

   "The government is concerned about the prospect of a steep depreciation of the US dollar," said Wang Qing, the Hong Kong-based chief economist with Bank of America.

   "Most of China's forex reserves are in US-dollar assets, and it's possible that the government wishes to diversify towards more assets in other currencies to reduce the potential loss from a falling dollar," he said.

   Some observers argue the Chinese government has already been quietly trying to extricate itself from this risk.

   They cite estimates that the share of US-dollar Treasury bonds is now 60 percent of China's forex reserves, down from 70 percent five years ago.

   But for a more radical approach to the problem of over-reliance on US dollar assets, the fresh perspective that a whole new company can offer is a good idea, analysts said.

   The State Administration of Foreign Exchange, which currently handles the reserves, does not necessarily have the required expertise, according to Zhang Ming, a Beijing-based economist with the Chinese Academy of Social Sciences.

   "They've got a lot of experience with low-yield government bonds, but they know relatively little about other types of assets," he said.

   But a cautious attitude is called for, due to the sheer weight China now possesses in global finance because of its huge reserves, observers said.

   It is an amount of money that could rattle global financial markets if allowed to flow out of China in a reckless manner, according to commentators.

   "The outflow will be carefully managed since a stable asset market is in the interest of China," said Zhou, the Shanghai-based analyst.