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.

Xiang Junbo,vice governor of the People's Bank of China. [file]

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.