The company is expected to sell bonds in the market to buy foreign exchange funds from the central bank. It will then use the foreign exchange fund for investment. The goal obviously is to have a higher rate of return on investment through professional management.

The cost of its capital, however, could reach 10 percent if taking possible renminbi revaluation into consideration. Given the cost level, it will be a challenge for the company to hire top professionals and establish a transparent information disclosure system to raise investment returns.

International experience shows that the foreign exchange reserve should be diversified to satisfy different policy strategies.

For China, as it manages its reserve fund, it is necessary to divide it into three categories: investment with high liquidity to prevent risks, earnings-targeted long-term assets and assets aimed at long-term value.

Considering the huge scale of the reserve fund, China needs to further clarify the fund's different functions. Meanwhile, a rational fund allocation regime should be established.

The establishment of the State investment company can reduce the hedging pressure on the central bank and will have a positive effect on China's monetary policy.

However, as the company issues bonds to purchase foreign exchange, it actually involves a transfer of policy costs from the central bank to the fiscal departments as the company is a State establishment and the State is the de facto guarantor for the bonds.

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