China should set up a special investment institution to manage its mounting foreign exchange reserves, an official with the Development Research Center of the State Council (DRC) has suggested.

Xia Bin, Director of the Financial Institute under the DRC, told the audience at the 2006 Invest in China Forum that the central bank should join hands with other government departments to find solutions to the management of forex reserves.

He proposed that a certain proportion of forex reserves be retained to guard against financial risks and stabilize interest rates, and the rest be managed by the Ministry of Finance or an independent investment institution.

"The central bank should be more open-minded about cooperating with other government institutions in managing these huge assets", he said.

Predictions from various sources suggest that forex reserves will stockpile at the rate of 150 to 200 billion U.S. dollars annually over the next five years, creating major macro-regulation challenges for the central bank.

The opportunity cost of investing solely in overseas financial assets is too high, Xia said.

Xia suggested the Ministry of Finance issue ten-year bonds to collect RMB from the market, and use the funds to purchase foreign currency from the central bank.

Such a move would help reduce pressure on domestic money supply, and limit the risks of a continuing depreciation of the U.S. dollar, he said.

An initial bond offering should be a moderate 25 to 50 billion U.S. dollars, he said.

Source: Xinhua