July 25 (Bloomberg) -- China should increasingly diversify its foreign-exchange reserves to reduce the risk of losses from declines in the dollar, the country's National Bureau of Statistics said.

It should also encourage Chinese companies to invest abroad to curb expectations of a stronger yuan, the bureau today said in a statement on its Web site. U.S. dollars account for ``more than half'' of China's foreign reserves, Yu Yongding, who advises on policy as a committee member of the central bank, said in a July 13 speech.

``The U.S. dollar may continue to weaken, increasing the risks of foreign-exchange losses in our currency reserves,'' the statement said. Speculation the dollar will fall ``also boosts expectations that the yuan will strengthen.'' The bureau, which regularly provides the government with economic suggestions, didn't provide reasons why it expects the dollar to fall.

The People's Bank of China buys dollars to prevent foreign- exchange inflows from boosting the yuan's value. That's pushed China's foreign-exchange reserves to the world's largest. The country's holdings as of June 30 jumped 32 percent from a year earlier to $941 billion.

``Diversification is a continuation of China's reserves management,'' said Tai Hui, an economist at Standard Chartered Bank in Hong Kong. ``There's evidence or suggestions China has been moving gradually away from U.S. dollars into other major currencies, such as the yen or euro.'' U.S. dollars probably account for 70 percent to 80 percent of China's foreign reserves, said Hui.

China's yuan has risen 1.5 percent since the government revalued the currency on July 21, 2005.

Hot Money

China will improve its financial regulations to curb inflationary pressures, the People's Bank of China said today in a statement on its Web site, reiterating a policy of keeping the currency stable.

The nation wants to slow appreciation in the yuan as it protects exporter profits.

Speculation the yuan will extend its rally against the U.S. currency also has raised the amount of ``hot money'' into China, the statement said. Such funds grew 12 times to $12.5 billion in May from February, the bureau said.

China should ``let the market determine the exchange rates, encourage enterprises to make investments abroad and curb fund inflows appropriately to reduce the supply of foreign currencies,'' the statistics bureau said.

`New Funds'

On March 5, central bank Governor Zhou Xiaochuan said China won't reduce its U.S. dollar holdings even as it changes the makeup of the nation's reserves to safeguard their value and achieve higher returns.

Dollar assets won't be cut back because the reserves are continuing to grow as the central bank changes the mix of its existing portfolio, Zhou said.

``This probably means China will diversify the allocation of new funds,'' said Hideaki Inoue, chief manager of derivatives an d fixed-income investment at Mitsubishi UFJ Trust & Banking Corp. in Tokyo.

Encouraging Outflows

The nation should use its reserves to buy gold and oil as a hedge to guard against the risk of a decline in the dollar, central bank adviser Yu said on May 26.

Today's statement came a day after China said it may allow its brokerages to raise hard-currency assets and invest them overseas for the first time as part of the central bank's efforts to encourage capital outflows and reduce pressure on the yuan to rise.

Fund outflows ``will be gradually increasing, but they probably won't have an immediate effect in reducing the upside pressure of the yuan,'' Hui said. The Chinese currency may strengthen 3.8 percent to 7.80 to the dollar by the end of this year, he said.

Sales abroad have helped the economy grow in the second quarter by the fastest in more than a decade. Gross domestic product rose 11.3 percent in the second quarter, the quickest since 1995, after the economy grew 10.3 percent in the first three months this year. Exports in June rose 23 percent to a record $81.3 billion.

To contact the reporter on this story: Christina Soon in Beijing at csksoon@bloomberg.net

Last Updated: July 25, 2006 04:22 EDT