China needs to retain around 650 billion U.S. dollars of foreign exchange reserves, said Cheng Siwei, vice chairman of the Standing Committee of the National People's Congress.

Cheng told a financial conference held over the weekend that 450 billion dollars should be earmarked as strategic reserves.

A further 200 billion dollars should be held to provide security for Chinese enterprises investing overseas and for individuals, because the Chinese currency is not freely convertible, Cheng said.

Cheng said that the government should reduce the inflow of foreign currencies, and allow more outflow of foreign currencies to gradually reduce its huge foreign exchange reserves.

China's rising trade surplus directly contributed to the country's forex reserves, Cheng said.

He suggested the government boost imports to reduce the soaring trade surplus and ink more government procurement contracts with foreign countries.

The government should tighten curbs on currency speculation, since anticipation of further appreciation of the yuan is another reason for the flow of foreign currencies into China, he added.

At the same time, the country could boost the outflow of foreign currencies by allowing Chinese corporations and individuals more access to foreign currencies, according to Cheng.

To ensure continued growth in the value of the nation's foreign exchanges, the country plans to establish a state forex investment company, charged with investing about 200 billion dollars of China's foreign exchange reserves.

Previous reports said that strategic energy investments would be a priority for the soon-to-be-established company.

China's foreign exchange reserves, which reached 1.066 trillion dollars at the end of 2006, have grown by more than 200 billion dollars annually in recent years.

Source: Xinhua