China doesn't need to keep all its money invested in hard-currency debt issued by foreign governments. Why should the authorities be satisfied with a less than 5 percent return on 10- year U.S. Treasuries when they could earn more by shifting some of the money to high-yield investments?

Better still, why not spend some of the cash on stockpiling resources that will be needed in ever-increasing quantities to keep the world's factory churning out everything from toys and electronics to clothes and automobiles in the years to come?

It's a view that is gaining ground within China.

"One trillion U.S. dollars is, of course, a huge number and there are many foreign assets that it can buy, apart from the usual liquid financial obligations issued by the developed countries in their currencies," Joseph Yam, the Hong Kong Monetary Authority chief, wrote last week.

"For a big and fast-growing developing country like China, there are many needs to be satisfied, such as the continued availability of strategic commodities, which is quite a legitimate area for some strategic allocation of financial resources," Yam said.

On Dec. 27, Xinhua, the state-run news agency, cited Vice Premier Zeng Peiyan as saying that a part of the country's foreign-currency war chest will be used to buy mineral resources such as coal, iron and oil.

Such a strategy might provide hawks in Washington with just the ammunition they need in getting the U.S. Treasury to label China as a currency "manipulator."

Remember the outrage in the U.S. Congress when CNOOC Ltd. tried to acquire Unocal Corp. in 2005? Some of the most stinging criticism of the failed bid was on account of the US$7 billion in dirt-cheap loans that CNOOC's state-owned parent, China National Offshore Oil Corp., was giving it to clinch the deal.

That episode is symptomatic of the backlash that China could expect if its government were to bankroll resource acquisition with funds acquired in the process of keeping the home currency undervalued at about 7.8 to the U.S. dollar.

China-bashers will see it as evidence of the country's mercantile intent, which is what the Treasury has to consider in deciding whether the yuan is manipulated or simply misaligned.

A warehouse of resources will invariably lead to their being made available to state-owned producers at below-economic cost. That may distort prices and sour trade relations. In the absence of resource constraints, the much-needed shift toward domestic consumption and away from exports and investments may be delayed.

Buying dollars by selling domestic bills is a money-making proposition for China's central bank. However, it is not a free lunch for the economy. An undervalued yuan is a tax on the present generation of Chinese consumers, who are forgoing a chance to enjoy imported goods cheaper.

The profitable acquisition of dollars by the central bank is financed by domestic lenders buying yuan-denominated Treasury bills at yields of about 2.5 percent.

Commercial banks accept such low returns because they have surplus money. Chinese savers, restrained by underdeveloped capital markets and strict controls on taking their money overseas, have few alternatives to local-currency bank deposits. Meanwhile, state-owned enterprises, which don't pay dividends, have too much cash on hand to require bank loans.

This state of affairs cannot continue indefinitely.

Excess liquidity is a big headache. Not all of the foreign money entering China, either through its ballooning trade surplus or for investments and speculation, is getting mopped up by the People's Bank.

A large part of it is sloshing about in the economy, adding froth to property and stocks, as evident from the central bank asking lenders last week to set aside more money as reserves, the fourth increase in the lockup requirement in seven months.

So if China's surplus savings must at all be redeployed, they must be used to find a permanent cure to the problem of plenty. Greater capital-account convertibility and substantial yuan appreciation will stem China's runaway reserve accretion.

As things stand, China is not ready for either.

Therefore, foreign-currency resources can be justifiably utilized to modernize the financial system, a prerequisite for a freely floating, convertible currency.

China's shifting of US$60 billion from its foreign reserves to recapitalize three of its largest banks is, thus, a wise move.

Nevertheless, it isn't a strategy that can be pursued endlessly or without restraint. If commercial banks knew they were going to be bailed out after every bout of bad lending, they would have little incentive to protect capital.

There are, however, other areas of the Chinese financial system that require attention. Why not use surplus foreign- exchange reserves to create from scratch a modern, fully funded pension system for China, as Deepak Lal, an economist at the University of California at Los Angeles, has suggested?

In a graying society, which is what China will increasingly become, old-age security will have much more economic value than a stockpile of iron ore.