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More importantly, as China holds a colossal amount of foreign exchange reserves, any changes in the structure and quantity of the reserves would cause fluctuations in the international financial market, which in return would have a direct or indirect impact on the management and value of China's reserves. As a result, regulators must be cautious.

The United States remains the world's superpower and the long-term strength and security of the US dollar is hardly disputable. In this situation, it is better for China to continue to hold the dollar as its primary reserve asset.

It has been argued that part of the large pool of reserves can be used to push domestic reforms and upgrade industrial structure. For example, the State has used foreign exchange reserves to inject billions of dollars worth of capital into State banks since the end of 2003.

Admittedly it is an innovative option and has achieved some results as those banks have had their corporate governance improved to varying degrees. But it should be seen as a special case and should not be applied to other banks. Otherwise it will incur the problem of "moral hazard."

A diversified mode of investment is the ultimate way out for the excessive accumulation of reserves.

It is most important, of course, to keep the renminbi stable to reduce expectations of renminbi revaluation and stall speculation. In this way, the reserves would gradually scale down.

Meanwhile, a smooth channel should be created to ease the legal flow of currencies across the border so that excessive domestic capital can be diverted into the international markets. This will lead to a natural shrinking of the reserves.

It is fair to say that the large stockpile of foreign exchange reserves is a sign of China's powerful economy. We should not worry about its sheer scale, but figure out how to effectively manage the reserves to increase their value.

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