Countering side effects of massive reserves

Ample foreign reserves have enhanced China's capability of countering the impact of hot money and boosting its economic strength, but the ample reserves have also come with some negative effects.

Zhuang said that the central bank has to buy foreign exchanges with its local currency, the yuan, resulting in the massive increase of funds outstanding for foreign exchange.

This will then add to the country's inflationary pressures, he said.

China's funds outstanding for foreign exchange surged 90.15 percent month on month to 407.91 trillion yuan in March, with growing inflows of foreign currencies through exports and foreign investment, according to the central bank.

Foreign exchange authorities also face a tough problem in maintaining and increasing the value of the massive foreign reserves on hand.

With the depreciation of both the U.S. dollar and the euro since the beginning of last year, China's foreign exchange reserves are suffering book losses.

The management of such a large amount of reserves is constrained by not only the market capacity but also the attitude of the investments' host country, said Yi Gang, vice governor of China's central bank.

"We are facing great challenges in investing our foreign reserves, and it is high time for us to improve the reserves management system," said Yi.

Guo Tianyong suggested that the foreign exchange authority promote the efficiency of utilizing the reserves on hand and further diversify investment channels.

"It's more important to accelerate domestic economic restructuring and make our international payment more balanced. Meanwhile, China should seek to make its yuan an international currency, and gradually make the yuan convertible under the capital account," according to Zhuang Jian.