A Study On The Choice And Adjustment Of Currency Composition Of China Foreign Exchange Reserves

The optimization manage of the foreign exchange reserves is not just a problem of how-much, but a problem of structure. Under the floating rate system, the foreign exchange reserves often face the rate risk. On the other hand, because the level of countries' economic development is inconsistent and the interest rate also varies, the rate of return varies with the amount of foreign exchange reserves. The direction of trade and capital flows also need to match the structure of the reserves. This shows that the choice of reserves' currency will not only affect the free role of reserve assets, also the ability of value-adding. Therefore, the choice and adjustment of currency kinds are the main aspects of the management optimization. Its main contents include the reserves' modality, the currency kinds and the reserve assets' structure.This paper includes five chapters. The research was to look back firstly, and made a corresponding definition of key concepts. Next, inspect the current status of China's foreign exchange reserve structure, summarizing the currency structure of China's foreign exchange reserves. Followed from the currency reserve structure to optimize the structure of the main factors affecting research, this paper introduces the three theoretical models: Asset Portfolio Theory, Heller—Knight Model and Dooly Model. Portfolio Theory stresses the returns and risks in arranging the structure of foreign exchange reserves. Heller—Knight Model stressed the balance of trade's effect in the currency structure of foreign exchange reserves decision. Dooly model shows the trade flows, the debt payment and the exchange arrangements will all affects the currency structure of foreign exchange reserves. There is some logic to each of these three models, but are not comprehensive enough. Rational currency structure of foreign exchange reserves should be established in the top three, that is to consider the risks and benefits in reserve assets and also consider the country's economic structure, including the structure of a country's trade, debt payment and exchange arrangements. This paper is based on the thinking above to study China's foreign currency reserve assets, and to obtain the optimal structure of China's foreign exchange reserve assets. In the end, I advise that China should change the scene of dollar's dominance as quickly as it can. With the more and more important status of pound and euro, China should increase the share of the both in foreign exchange reserves.