China economist proposes steps to slow FX reserves

BEIJING, Apr 10 (Reuters) China should push yuan reforms, let firms hold more foreign currency and raise gold reserves as part of steps to help slow down the rise in foreign exchange reserves, an influential government economist said.

China should ideally hold about 0 billion in foreign exchange reserves to ensure debt repayment, the finance of imports and to maintain stability, Xia Bin, head of the financial research institute at the cabinet's Development Research Centre, said in a research report seen by Reuters on Monday.

The rapid rise in the reserves, the world's largest at 3.6 billion at the end of February, made it hard for the central bank to control money supply and indicated China's failure to keep badly needed capital at home, Xia said.

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 dollars generated by a growing trade surplus and the inflow of foreign direct investment and speculative capital.

China has been 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 American interest rates low.

China is keen 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 foreign exchange reserves.

''How to effectively ease the upward pressure is key for the yuan exchange rate reforms and also key in resolving the problem of the runaway growth in foreign exchange reserves,'' Xia 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.

In July, China revalued the yuan by 2.1 percent against the dollar and shifted to a managed float. The yuan has appreciated a further 1.3 percent versus the dollar since then and the pace of rises has quickened in recent weeks, ahead of President Hu Jintao's visit to the United States.

The government should 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 kept at a ''excessively'' low level in recent years, to reflect China's status as a major trading nation, he said.

Part of the forex reserves could be used to recapitalise state banks following the injection of billion into China Construction Bank Corp., Bank of China and Industrial and Commercial Bank of China, Xia said.

Reuters PV DB1137