CHINA will merge Central Huijin Investment Co, the government's investment arm, into a new agency to better manage mounting foreign reserves, deputy governor of the central bank said over the weekend.

The new State Investment Co will assume the responsibilities of Central Huijin, Wu Xiaoling, deputy governor of the People's Bank of China, said at a forum in Shanghai on Saturday.

Central Huijin has controlling stakes on behalf of the government in the nation's three-biggest state-owned banks.

"The government will enhance Central Huijin's decision-making power and let it have more say in the stakes it holds based on a market-oriented mechanism," Wu said.

Central Huijin played a key role in the restructuring of state-owned banks.

Central Huijin completed bailouts to lenders such as Bank of China, China Construction Bank and Industrial and Commercial Bank of China. The three received a combined US$60 billion through Huijin from the central bank.

The three banks reported an average profit growth of 26 percent last year.

Central Huijin was set up in December 2003 in Beijing with registered capital of 372.5 billion yuan (US$47.2 billion).

Wu declined to release further details on the merger of Central Huijin and State Investment.

Minister of Finance Jin Renqing said in March that the country would set up a new state investment arm to better manage foreign exchange reserves. Forex reserves topped US$1.2 trillion, the world's biggest, as exports boomed.

The Ministry of Finance on Friday won approval from law makers to issue 1.55 trillion yuan of special treasury bonds to buy up a portion of China's foreign-exchange reserves and inject those funds into the planned State Investment Co.

The benchmark Shanghai Composite Index dropped 2.39 percent to 3,820.70 on Friday after tumbling 4.03 percent on Thursday.