The Chinese central government needs to maintain its high level of reserves, because under their system they are also the guarantor for all local and provincal government debt (which is enormous).
Er, what would a local or provincial government do with dollars? Unless they dollarize the economy, they would just ask to convert them to RMB. The government has bailed out some banks with dollars which they cant convert, but that is easier as its last resort capital.
The Chinese central government needs to maintain its high level of reserves, because under their system they are also the guarantor for all local and provincal government debt (which is enormous).