As a large economy, China may experience something that seems unusual to other countries. No other countries have piled up so much in foreign exchange reserves, but it does not mean that a stockpile of such magnitude will become unaffordable for China.

What needs to be clarified now is which part of the reserves is normal trade surplus and which part is "hot money" that has flowed into China to take advantage of the defects of China's foreign exchange regime to speculate on the revaluation of the renminbi.

If such loopholes are found, foreign exchange regulators should seriously review the current regime to deal with the loopholes and prevent foreign capital from entering the country to push the revaluation of the renminbi.

What really counts is how to effectively manage foreign exchange reserves. Its scale does not matter.

Few would deny that "using money to make money" is the best and fastest way to accumulate wealth. If managers of the reserves can find proper investment channels, it would be more possible that the reserves would appreciate.

Technically, the cost of the reserves can be measured by the interest rate of the renminbi, while the returns can be measured by the interest rate of foreign exchange currencies. The interest rate of US treasury bonds that China holds is 5 per cent, while the base interest rate of the renminbi is 2.52 per cent. Given the interest rate gap it is worth holding foreign exchange reserves, whose rate of return is higher than the general rate of domestic financial markets.

If China can diversify its holdings and investment instruments, the return rate may be higher than that of US treasury bonds.

There are a good number of investment institutions in the international markets. China needs to make good use of those investors and form an effective and diversified investment mechanism so that the reserves can appreciate.

Scholars have put forward a slew of proposals on the management of the reserves. What is sure is that regulators will choose the best methods based on their professional knowledge and information to increase the value of the reserves.

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