China needs to retain foreign exchange reserves of around US$650 billion of, Cheng Siwei, vice chairman of the Standing Committee of the Tenth National People's Congress (NPC), told a financial conference over the weekend.

US$450 billion should be earmarked as strategic reserves, and a further US$200 billion 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 US$200 billion 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 US$1.066 trillion at the end of 2006, have grown by more than US$200 billion annually in recent years.

(Xinhua News Agency April 4, 2007)