China's money managers have diversification -- and, some say, oil and minerals -- on their mind.

Awash in $1.07 trillion of foreign exchange reserves due to huge trade surpluses, China has unveiled a plan to let a new state investment agency manage these funds, rather than its central bank.

China's shift has sparked rampant speculation. One possibility is that the new agency will invest in areas of strategic interest, such as Latin America and Africa, because of their natural resources.

The plan could have major implications for the dollar and Beijing's influence around the world.

China earned just 3% on its reserves last year. It's been a huge buyer of low-yield U.S. Treasuries and is now the No. 2 holder of such debt, keeping interest rates low here.

China says it still plans to buy Treasuries, in part to support the dollar. But, it will use 20% to 25% of its reserves to seek higher returns.

Many observers don't expect bold moves by China.

"It's highly unlikely Beijing will move more than a fraction of (reserves) out of fixed income," said Andy Rothman, China macro strategist at CLSA Asia-Pacific Markets.

"I don't think they will use this agency in an effort to deal with energy security or other non-investment goals. Its investments will be guided by returns."

The agency will be Asia's largest government-controlled investment fund and one of the world's biggest institutional investors.

China's currency reserves ballooned by $247 billion last year to $1.07 trillion. But China will stop stockpiling reserves, central bank governor Zhou Xiaochuan said in an interview published Tuesday.

That suggests China's new investment arm will be busy. For starters, it will manage about $250 billion. That fund could easily double over the next three years, says a Morgan Stanley report.

China's February trade surplus blew out forecasts, widening to $23.76 billion. China's trade surplus could pump $50 billion annually into the new agency over the next few years, said HSBC analyst Qu Hongbin.

Big Deal Or Just Sensible?

The fund "could become a major factor in global equity markets," said a Morgan Stanley report.

Others played down the impact.

"This is not meant to be a 'big bang' event," said James Barth, an Auburn University professor. "It's just a sensible move to diversify."

Having 70% of reserves in dollar assets poses problems. China lost billions of dollars last year as the yuan rose vs. the greenback.

But selling Treasuries and other U.S. assets would likely cause the dollar to decline further, creating further losses.

China has tried to reassure the world about its aims. Premier Wen Jiabao said last week that "I can assure you that by instituting such a foreign exchange company, it will not have an impact on U.S. dollar-denominated assets."

But Zhou's comments pushed the dollar lower on Tuesday.

China's new agency "will be in a position to reap political returns over time," said Barth, a fellow at the Milkin Institute.

Singapore Model

China plans to model its new agency after Singapore's government-owned investment arms.

Singapore's Government Investment Corp. invests in fixed income, equities, commodities, money markets and real estate. Singapore's Temasek Holdings operates much like a large private equity firm. It invests in domestic and foreign companies.

HSBC's Hongbin says China's policymakers have implied the new fund will invest in "global financial assets that offer higher returns or venture capital assets that suit the country's long-term development strategy."

But Stephen Green, economist at Standard Chartered, says China's new agency could become a vehicle for "buying up strategic raw materials." He says it may also support China's "Strategic Petroleum Reserve" project.

Early on, China's new agency plans to invest in domestic energy companies, say some reports.

The new agency may target some investments for Latin America, Africa and emerging markets in Asia, such as Indonesia.

China's surging economy is fueling massive demand for energy and raw materials such as copper, spurring a drive to acquire commodity assets.

But in Western nations, China's state-owned companies' ambitions have been thwarted.

In 2005, congressional objections forced state-run China National Offshore Oil Corp. to drop its takeover bid for Unocal. Canada's government intervened that same year when state-owned China Metals tried to buy Noranda, now part of Xstrata.

China's new investment arm could take minority stakes in foreign firms, mitigating the political backlash, some analysts say. But others, like Donald Straszheim of Roth Capital Partners, expect Beijing to seek 100% takeovers.

China already has made inroads in Latin America, heightening tensions with the U.S. A state-owned Chinese energy firm owns a stake in Argentina's PlusPetrol Norte. And, China has signed a wide-ranging oil deal with Venezuela's President Hugo Chavez.

China's new agency will have many tools to expand its regional influence, says Nouriel Roubini, economics professor at New York University. It could acquire equity stakes in listed firms as well as buy up sovereign debt.

Emerging market risks won't scare off the Chinese, he says.

"If it's a choice between emerging market sovereign debt and high-yield, corporate junk bonds in the U.S., they could just as easily go with the EM debt, it's not any more risky," Roubini said.

Buying sovereign debt may have political benefits as well. "That's what Chavez has been doing all over Latin America, buying sovereign bonds," Roubini added.

Long term, China still plans to keep about 80% of reserves liquid in case of turmoil. China has injected over $70 billion from its reserves to shore up state-controlled banks.

China may tap outside expertise to manage the new agency's portfolio. Rothman says China will need to set up internal controls to deal with "corruption opportunities."

Analysts say it will be hard for other governments and financial services firms to figure out what the new agency buys.

Beijing hasn't said how soon the new investment arm will take over its currency reserves.

It may not have much of an impact "anytime soon," said Paul Cavey, China economist at Macquarie Securities. "It will take time to set up, and then they have to find the people with the right experience to staff it."