SINGAPORE - You know the feeling, you have $3 trillion in foreign currency burning a hole in your pocket and you are itching to spend. But on what? A mountain of gold, a sea of oil or a pile of paper?

So far China has chosen paper, especially in the form of US treasury bills. But comments this week by China's central bank chief that the country's foreign exchange reserves exceeded reasonable requirements, and local media reports that Beijing was considering setting up investment funds in energy and precious metals, again raise the question about what the country can do with its money.

The size of the issue is staggering - in the first three months of the year China's reserves grew by $197 billion to $3.05 trillion.

At first glance, investing in gold, which is at record highs, or oil, which has rallied for each of the past eight months, makes sense.

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Gold has thousands of years of history as a store of value, but no nation has ever looked at oil as a way to diversify foreign exchange holdings, only as a strategic resource in case of war or disaster.

There is a very good reason for that - unlike gold, which can sit in a vault indefinitely, oil degrades once it has been pumped out of the ground and a tank of crude would be essentially worthless after 20 years.

Diverting even 10 percent of the nation's mostly dollar-denominated treasure chest into commodities would cause huge ripples, and risk fuelling Beijing's current bugbear - inflation.

"These are very big numbers, but how can China get into these markets without driving them to incredible levels? Any sniff they are actually doing this would send prices through the roof," said Jonathan Barratt, managing director of Commodity Broking Services in Sydney.

Beijing might be more willing to risk disrupting the bullion market than one that would have a greater direct impact on the lives of ordinary Chinese people.

"Inflation is perceived as a real threat to social stability in China, and anything that risks higher prices, especially of basic staples like food and energy, will not be tolerated," Barratt said.

"Diversification of foreign reserves is certainly a worthy idea," said Lu Feng, professor of economics at the China Center for Economic Research at Beijing University.

"However, the experience in the past few years shows that the endeavor could be very difficult - the scale of the foreign reserve is so massive that the price of anything that the state showed an interest in purchasing with the reserve would go up." He said those price rises, even if the purchase was successful, meant the state might end up losing even more money than by holding on to the currency.

Reuters