Yu Yongding, an adviser to People's Bank of China, told Platts on Friday that China is diversifying its foreign currency reserves but denied earlier reports by the global and Chinese newswires that he urges China to buy more gold.

"China has diversified its foreign currency reserves in the past, that is a fact. We have diversified the reserves gradually and it is an on-going process. But I am not making any recommendations about the future," Yu said.

Yu is a member of the Monetary Policy Committee that is a consultative body for determining the monetary policy of the People's Bank of China.

According to World Gold Council data, People's Bank of China has 600 mt reserves of gold, tenth among the central banks worldwide. China's reserves are the second highest in Asia after Japan's 765.2 mt.

Chinese consultants and analysts had been quoted in the media urging the country to expand its gold reserves, generating market talks that China would step up its gold purchases when gold prices fall close to $600/oz. The bullion traded at $628.50-629.30/oz at 0630 GMT Friday.

"There are talks of China raising reserves to 2,500 mt," said Eiki Matsumoto speaking at a seminar held in Tokyo on May 17, 2006, hosted by a Japanese futures brokerage firm Hoxsin Bussan.

Yuki Sonoda, an advisor to a Japanese brokerage firm Daiichi Shohin, however, expressed a view that increased gold reserves would not necessarily benefit the Chinese economy.

"China's currency is far from liquid in the international markets. China needs liquid currency, needs to make its currency liquid like the US dollar. Gold is even less liquid," he said.

Meanwhile, the Tokyo futures market on Friday hardly reacted to Yu's earlier statements. "The market is in a bearish mood on the back of liquidation pressure, and this news is having no affect at all," he said.