BEIJING, March 21 -- China should balance risks and returns to manage its foreign-exchange reserves and can't fully follow any foreign model in investing the money, senior law maker Cheng Siwei said Tuesday.

    "If China's forex reserves had been used effectively, the investments might have offered higher yields," Cheng, vice chairman of the Standing Committee of the National People's Congress, said in a speech at Fudan University in Shanghai.

    "But the government should always strike a balance between the (forex's) safety, liquidity and profitability."

    Cheng, a senior economist in finance and management, was invited to be a guest professor at the University to give lectures periodically.

    China is setting up a new agency to manage part of the country's US$1 trillion-plus in forex reserves as it bids to diversify into higher-yielding investments and strategic assets.

    Nearly 70 percent of forex money is reportedly held in United States dollar assets, such as Treasury bonds.

    The nation should be cautious against forex risks such as "the potential depreciation" of the greenback, which could hurt the reserves' value, Cheng said.

    China shouldn't simply copy any foreign model like that of Temasek Holdings Pte to run the new forex management firm but must work out its own way, according to Cheng.

    Temasek is Singapore's state-owned investment company, which has made a raft of strategic equity investments in overseas enterprises, including large banks and technology firms.

    Cheng recently said that the Chinese capital market faces risks of "bubbles," which are believed by some analysts to have triggered the latest corrections in some high-valued yuan shares.

    "I'm generally confident about the stock market," because it adopts "wave-style spiral-ascending" growth, Cheng said.

    But he warned investors to step in only at the right time and avoid chasing over-valued stocks.

    "The government shouldn't be responsible for the equities' rises or dips," said Cheng. "Rather, it should beef up efforts to create a fair and open market scenario." Talking about China's banking reform, Cheng noted that asset quality at domestic lenders has improved a lot but there's still a long way for them to go to catch up with international standards.

    "Local banks need 10 years to catch up with overseas lenders such as HSBC in terms of risk management and business scope," Cheng said.

    "To achieve this goal, they must continue to improve internal management and step up financial-product innovation."

    (Source: Shanghai Daily)