China seeks new ways to use FX reserves - official

An employee counts yuan banknotes at a Bank of China branch in Changzhi, Shanxi province January 13, 2010.

BEIJING (Reuters) - China will look for new ways to invest the world's largest foreign exchange reserves this year to generate higher returns, a senior regulatory official said on Thursday.

It would be a challenge for the country not just to preserve but to increase the value of the $2.4 trillion stockpile, said Guan Tao, head of the international balance of payment department at the State Administration of Foreign Exchange (SAFE).

In 2008, Beijing transferred $200 billion from the foreign exchange reserves to sovereign wealth fund China Investment Corp as part of efforts to seek higher returns.

"Making more efficient and diversified use of foreign exchange reserves is an important issue for China. We will explore this issue further this year," Guan said.

The currency composition of China's reserves is a closely held secret, but many economists assume the majority of it is held in U.S. dollar-denominated securities, likely Treasury debt.

China had been a net seller of $12 billion in Treasuries in the last six months, Alan Ruskin, Royal Bank of Scotland economist, said in a note, citing U.S. government figures.

Guan also said that China would continue to face capital inflow pressure in the foreseeable future.

However, SAFE said on Tuesday that a $453 billion increase last year in China's foreign exchange reserves partly reflected the effect of currency valuation and was not solely due to inflows of speculative funds.

Guan added that China would try to cut its trade surplus to 3 percent of gross domestic product in the next five years as part of efforts to reduce global economic imbalances.

China's trade surplus fell 34 percent in 2009 to $196 billion and GDP grew 8.7 percent to 33.53 trillion yuan.