China is unlikely to sell current U.S. dollar assets in its foreign reserves to diversify its holdings, the chief of research at the central bank said on Tuesday, contradicting market speculation.

Media last week had wrongly interpreted a statement from the foreign exchange regulator as meaning that China would sell U.S. dollar assets, Tang Xu, director-general of the research bureau of the People's Bank of China, told Reuters.

The reserves now exceeded $800 billion, he said.

Asked whether the yuan would appreciate sharply, Tang said: "It is unlikely."

The new forex trading system introduced since the currency's 2.1 percent revaluation in July was more flexible and responsive to market supply and demand, he added.

"The general trend is that every country wants to diversify its reserves," Tang said on the sidelines of a conference.

"No one is willing to put all of their eggs in one basket and it is impossible for China to put all its forex reserves, which exceed $800 billion, in one currency.

"But it is unlikely that China would reduce its current dollar assets to increase the proportion of other assets," he said.

Dollar assets still dominated the reserves, whose mix was based on the currencies that denominated China's exports and imports.

On Thursday, China's State Administration of Foreign Exchange issued a statement on its priorities for 2006 and said it would "improve the operation and management of foreign exchange reserves and actively explore more effective ways to utilise reserve assets."

Investors globally and some media took that as a hint that China may diversify into other currency holdings or commodity-based assets.

"That was definitely a misunderstanding," Tang said.

(Source: Reuters)