Dollar dilemma as greenback value falls (2)

How to make better use of the world's largest biggest foreign exchange reserves became the core issue. Is it still best to continue to expand holdings in US government bonds?

"The huge amount of reserves in US dollars could be transferred into residents' pockets or used to launch special investment funds to help Chinese enterprises expand overseas," wrote Qiu Xiaohua, the chief economist of Minsheng Securities Co, in a posting on Sina Weibo on Feb 14.

"A third approach would be to use a part of it as an international development fund to support economic growth in undeveloped regions, such as some African countries," Qiu added.

Xi Junyang, deputy director of the Shanghai University of Finance and Economics Center for Financial Research, disagreed with distributing the reserves to individual residents or spending it in China, which would lead to serious inflation.

"The foreign exchange reserves come from overseas. They can only be used for external payments," Xi said.

"The most important thing is to improve the international balance of payment, rather than finding the ideal way to use the foreign exchange reserves," said Chen Yuyu, an associate professor with the Guanghua School of Management at Peking University.

The central bank may need to set up new institutions for foreign investments based on the reserves, he added.

The central bank could launch a special account overseas in which it could invest the foreign exchange reserves. Any returns could be added to China's social security fund, said Guan Qingyou, deputy head of the Research Institute at Minsheng Securities.

An official from the State Administration of Foreign Exchange announced on Jan 14 that a new office called SAFE Co-Financing had been launched to handle trusted loans based on the country's foreign exchange reserves.

The main duty of the office is to seek out new channels in which to invest the reserved capital. "It will be an important element in innovating the use of the foreign exchange reserves to avoid their value falling," a SAFE statement said.

The "innovation" will be guided by market-oriented rules and be controlled under a strict risk-management system, the official pledged.

Xinhua News Agency reported the new office had already started pilot work before the announcement. SAFE provided the capital and entrusted the China Development Bank to lend money to Chinese enterprises aiming to expand their business overseas.