(ShenzhenDaily, Sept 29, 2006) THE government should take steps to slow the accumulation of foreign exchange reserves, including launching high-yield funds to lure firms and households to foreign currencies, an influential economist said Thursday.

Ba Shusong, vice head of the financial research institute at the Development Research Center, a think tank under the State Council, said the government should continue to spur capital outflows and consider using part of its reserves to shore up the social welfare system.

¡°More importantly, we should encourage firms and individuals to hold foreign exchange through financial innovations, rather than piling up foreign exchange in the hands of the government by imposing strict controls,¡± Ba said.

Ba suggested that the government should launch high-yield domestic funds backed by its foreign exchange holdings, most of which are invested in overseas government debt, to make it more attractive for firms and individuals to hold foreign currencies.

The plan would be similar to the Qualified Domestic Institutional Investor (QDII) program, which was launched in April to spur capital outflow.

QFII has met a tepid response because of expectations of a stronger yuan and limited investment options.

Premier Wen Jiabao said earlier this month that China¡¯s hoard of foreign exchange reserves had grown too fast, bloating the money supply, but that the country was taking measures to make better use of the stockpile.

China¡¯s reserves, the world¡¯s largest, swelled to US$954.5 billion at the end of July, indicating upward pressure on the yuan.

The Securities Times quoted Fan Gang, a member of the central bank¡¯s monetary policy committee, as saying Monday that China¡¯s foreign currency reserves are forecast to hit US$1 trillion by the end of October.

But China should refrain from letting the yuan rise sharply to undertake too heavy a burden in correcting global economic imbalances, Fan said.

Calls for the government to diversify the currency mix of the reserves, and to use some of the holdings to boost China¡¯s energy reserves, have gained momentum in recent weeks.

Some government economists have suggested using part of the reserves to bail out small commercial banks.

China has injected a combined US$60 billion in foreign exchange reserves into three big banks, Bank of China, China Construction Bank and Industrial and Commercial Bank, to shore up their balance sheets prior to going public.

source:ShenzhenDaily