Banker: China should use forex to buy oil

China should find more ways to use its huge foreign exchange reserve by "reasonably" increasing the holdings of gold and buying strategic resources, including oil and metal, said a central bank vice governor Tuesday.

However, Xiang Junbo said he was not speaking on behalf of the People's Bank of China and giving his own opinion in a speech he made at the Fudan University in Shanghai, according to the International Finance News.

At the end of the first quarter, China's foreign exchange reserve reached US$1.2 trillion, the world's largest, according to the central bank. It is estimated that more than 70 percent of the holdings are low-yield US treasuries.

The country is in the process of setting up a state forex investment company modeled on Singapore's government-owned investment arm Temasek to look for higher-yield opportunities worldwide.

This new firm is expected to receive anywhere from US$200 billion to US$400 billion from the central bank.

Xiang also suggested the Chinese government should establish a closed-end fund to raise capital from the domestic market before buying forex from the central bank for overseas investment.

Part of China's forex reserve should be invested in low-risk overseas bond market, he continued, adding that another portion of the reserve should flow into state-owned, policy and share-holding banks in an effort to facilitate their international expansion.

The vice governor noted an interest rate hike had a limited role in curbing excess liquidity that is currently plaguing China's economic situation.

Raising the bank's reserve requirement and issuing central bank bills could better absorb the capital, he added.