BEIJING, Feb. 7 -- The government should ideally cut its foreign exchange reserves by half at the end of last year, to help ward off risk and ease upward pressure on the yuan, a Bank of China official was quoted as saying yesterday.

    China's foreign exchange reserves swelled 34 percent in 2005 to a record US$818.9 billion, signaling upward pressure on the yuan despite July's revaluation, setting off calls by some Chinese economists to find ways to slow down the growth.

    "China's foreign exchange reserves should roughly be kept at a level between US$300 billion and US$400 billion, which will be appropriate," the Financial News quoted Wang Yuanlong, a director at Bank of China's Australian operations and former economist at the bank, as saying.

    "China should use its interest rate policy and exchange rate policy to adjust the foreign exchange reserves," Wang said.

    Wang said China needed adequate foreign exchange reserves to fend off risk as it was in transition between a planned and market-driven economy, but the current level of reserves had far exceeded conventional prudence.

    The soaring reserves made it hard for the central bank to control money supply, while it faced an "opportunity cost" as the chunk of the reserves had been invested in U.S. Treasuries, which usually yielded less than foreign investment in China, he said.

    China should also "reasonably choose currency structure and asset structure for its foreign exchange reserves," Wang said.

    China's reserves, which will soon surpass those of Japan as the world's highest, are enough to repay its entire foreign debt and still buy 10 months' worth of imports.

(Source: Shenzhen Daily/Agencies)