China is studying the possibility of investing a portion of its $3.4 trillion in foreign exchange reserves in US real estate, said two people with direct knowledge of the situation.

The State Administration of Foreign Exchange began the study after seeing signs of a recovery in the US property market, said the people, who asked not to be identified as they weren’t authorised to speak publicly about the matter.

China may acquire properties, invest in real estate funds or buy stakes in property companies, they said.

The safety of the investments will be the top priority, said the people, who didn’t elaborate on a timetable or other details.

China has set up an operation in New York to make alternative investments in the US, an effort by the country’s foreign-exchange reserves manager to diversify away from US government debt, the Wall Street Journal reported last week, citing people it didn’t identify.

Prices for single-family homes increased in 89 per cent of US cities in the first quarter as the housing market extended its recovery following a five-year slump.

The median sales price rose in 133 of 150 metropolitan areas measured from 74 areas a year earlier, the National Association of Realtors said in a report on May 9th.

The foreign-exchange agency, which also regulates the Chinese currency, didn't immediately reply to faxed questions today from Bloomberg News seeking comment.

China Investment Corporation, the nation's sovereign wealth fund set up in 2007 to seek higher returns on part of the reserves, is adding stable-return assets including infrastructure and real estate as it cuts an "over-reliance" on US debt, then-chairman Lou Jiwei told a forum in Hong Kong in January. Mr Lou was named finance minister in March.

Bloomberg