BEIJING, April 12 -- The country should push yuan reforms, let firms hold more foreign currency and raise gold reserves to help slow the rise in foreign exchange reserves, an influential government economist said.

    China should ideally hold about US$700 billion in foreign exchange reserves to ensure debt repayment, finance imports and maintain stability, Xia Bin, head of the financial research institute at the State Council's Development Research Center, said in a research report.

    The rapid rise in China's reserves, the world's largest at US$853.6 billion at the end of February, had made it hard for the central bank to control money supply and showed that China has failed to to keep badly needed capital at home, Xia said.

    A spokesman at the State Administration of Foreign Exchange, which manages the reserves, declined to comment on the report yesterday.

    The reserves have soared in recent years as the People's Bank of China, trying to hold down the yuan, has bought most of the U.S. dollars generated by a growing trade surplus and the inflow of foreign direct investment and speculative capital.

    Investing those dollars, China has become a big buyer of U.S. government bonds and other dollar assets, helping to finance a heavy U.S. current account deficit and to keep U.S. interest rates low.

    "We cannot underestimate the possible loss to the reserves if, in the long run, the United States adopts a weak-dollar policy and we are still maintaining a high level of dollar reserves," Xia said.

    China is eager to hedge risk by diversifying its reserve holdings away from the dollar, but economists say that fears of a collapse in the U.S. currency will prevent any dramatic shift.

    Xia suggested the government should consider a combination of measures to slow down the build-up of China's foreign exchange reserves, including giving the yuan more leeway to move.

    "How to effectively ease the upward pressure is vital for the yuan exchange rate reforms and also vital in resolving the problem of the runaway growth in foreign exchange reserves," he said.

    China must follow its own independent policy, regardless of foreign pressure, by letting market forces adjust the yuan's value towards its "equilibrium level," he said.

    The authorities should keep the yuan's crawling appreciation and "appropriately widen its floating band," Xia said.

    China revalued the yuan by 2.1 percent against the U.S. dollar to 8.11 and shifted to a managed float last July. The pace of the yuan's rise has quickened in recent weeks, ahead of President Hu Jintao's visit to the United States later this month.

    The yuan closed at 8.0064 per dollar Monday, the strongest close since the revaluation last July and a further appreciation of 1.3 percent since then.

    The government should also consider allowing firms to hoard more foreign currency and establish an investment fund to channel hard currency and personal investments overseas, Xia said.

    The central bank might need to raise its gold reserves, which had been too low in recent years, to reflect China's status as a major trading nation, he said.

    Part of the foreign exchange reserves could be used to recapitalize State banks following the injection of US$60 billion into China Construction Bank Corp., Bank of China and Industrial and Commercial Bank of China, Xia said.

(Source: Shenzhen Daily/Agencies)