Research On The Administration Of China's Foreign Exchange Reserve

With increasing global economic integration and financial liberalization, countries are more closely related to the outside economies. There is some new development on the objective functions of foreign exchange reserves. In recent years, the level of foreign exchange reserves in developing countries and regions such as China have become excess instead of shortage in the past, causing serious internal and external imbalances. We need to reconsider the management of foreign exchange reserves in the open circumstance.The core of foreign exchange reserve theory is the appropriate scale and management of foreign exchange reserves. Identifying the functions of foreign exchange reserves is critical to the research on the appropriate scale of reserves. The objective functions of foreign exchange reserves are the basis and proof of foreign exchange reserve theory. It is also the basis in determining the appropriate scale and management of foreign exchange reserves. We can only discuss the need for one thing and how to better manage and use it if we clearly define the use of it.The first chapter of this thesis reviews the relevant literatures of foreign exchange reserves management, including the study on functions, appropriate scale, asset management of reserves, and the relationship between foreign exchange reserves and macro economy; From the point of view of functions of reserves, chapter two studies the appropriate scale of China's foreign exchange reserves. Based on the analysis on the essence of appropriate reserves scale and the cost of reserves in developing countries, this chapter reveals the moderate degree of China's reserves amount. Finally we estimate the appropriate scale range; The chapter three investigates China's excessive reserves and macro economy. According to the identical equation of national income, we explain the internal and external imbalance. From the source of foreign exchange reserves, this chapter studies the macroeconomic factors lead to rapid growth of China's reserves and discusses the effects of excessive reserves on China's macro economy; Then chapter four conducts theoretical and empirical analysis of currency choice in China's reserves. From the general principals of reserves currency structure, it analyzes consulting factors in selecting currencies and assets structure of foreign exchange reserves. Referring to the Heller-Knight model and Dooley model, we carry out an empirical study on the reasonable currency portfolio of China's reserves; The chapter five summarizes international experience of managing foreign exchange reserves. After introducing the characteristics of developed countries and developing countries, it discusses the active management of foreign exchange reserves and management styles of government investing corporation; From three perspectives of scale management, structure management, risk management, the final chapter puts forward some suggestion to improve on China's foreign exchange reserves management.Main conclusions of this thesis include following aspects. First, the functions of foreign exchange reserves have extended from traditional security of international payments against external vulnerability and means of intervention in the exchange market to security of confidence of internal economy, financial system and financial stability, national wealth, monetary policy tools, and means to increase monetary policy reputation and stabilize exchange rate expectation, etc. Second, as we can see from empirical analysis, China's reserves have already accumulated to an excess amount, which deteriorates the internal and external imbalances and brings negative impacts on the national economy. Third, the fundamental reason of China's large reserves is the internal and external economic imbalances, which are the result of the imbalance of China's internal economic structure. Both high saving and low expenditure cause China's internal imbalances, meanwhile trade surplus and capital inflows lead to external imbalances. Fourth, Countries with excess reserves should decide the currency and asset structures of reserves according to the functions of foreign exchange reserves. They need to abandon the traditional concept that excludes equities as one reserve asset class, and implement active management of foreign exchange reserves to invest in equities and commodities. This can not only diversify reserve assets and risks but also increase returns. The thesis also studies the active reserves management in Singapore, Norway and Korea, and summarizes the methods of active management in countries with large reserves.