The Optimal Scale Of Foreign Exchange Reserves Of China: Theory And Empirical

Foreign exchange reserve is important to an open economy. It is important means for governments to adjust the balance of payments, is the assurance to repay external debts,. At the same time, it can intervene foreign exchange market and maintain the stability of currency. But it dose not mean that the economy should own as much foreign exchange reserve as it can because there exists costs. For example, too much foreign exchange reserve will cause inflation and revalue of the currency, and also, will impact the independence of government's currency policy. In recent years, with the rapid development of relationship between countries, the scale of capital flow is expanding speedy. It has been concerned that to an economy, what is the optimal scale of the foreign exchange reserve.Ever since 2001, the scale of foreign exchange reserve in China increases rapidly. The growth rate of foreign exchange reserve is 33.2% from 2001 to 2010, and the absolute value of foreign exchange reserve increase from 2,122 to 28,473 billion U.S. dollars. In addition, China has exceeded Japan to be the country which has the largest scale of foreign exchange reserve. At the end of March,2011, the scale of foreign exchange reserve of China has reached 30,446 billion U.S. dollars after being the first economy who owned foreign exchange reserves over 10,000 billion U.S. dollars in 2006.The rapid growth of the scale of foreign exchange reserve in China has an impact on macroeconomic and at the same time causes the imbalance of global economy to some extent. On one hand, the rapid growth of foreign exchange reserve in China is one of the important reasons for the global growth of foreign exchange reserve, which leads to the change of structure of global foreign exchange reserve. On the other hand, there are differences of trends of growth between China and other emerging market countries. Therefore, it has been concerned about the growth of foreign exchange reserve in China by the whole world. The first chapter of this paper contains proposal of questions, research methods, research ideas and how about other scholars'contributions. The second chapter talks about theories about the optimal foreign exchange reserve. The third chapter introduces situation in China and analyzes reasons of the rapid growth of foreign exchange reserve in China from the view of external debts etc. The fourth chapter analyzes positive and negative effects of the rapid growth of foreign exchange reserve in China from different point of views. The fifth chapter chooses several variables which may be the factors that will affect the scale of foreign exchange reserve in China. At the same time, the paper collects data from 1985 to 2009 and tries to find factors impacted the scale of foreign exchange reserve in China through regression analysis. The conclusion is that the risk of external debts and the scale of the country are both important factors besides GDP of the country. The next chapter talks about the theory based on the maximum of the utility which is rather new in this field and introduces real exchange rate into the model. At the remaining part of this chapter, the optimal scale of foreign exchange reserve in China was estimated. The last chapter summarizes the conclusions of the whole paper and gives some suggestions about the management of foreign exchange reserve in China.