A Study On The Moderation Of China's Foreign Exchange Reserves

This thesis takes the moderation of China's foreign exchange reserves as the object. The moderatest foreign exchange reserve is a combination of appropriate size and reasonable composition. The reserves size which is not appropriate can be a burden to the macroeconomic while unsuitable reserves composition will directly affect the negotiability, security and profitability of foreign exchange reserves. In this connection, through study and analysis of the appropriate size and the suitable composition of China's foreign exchange reserves, the paper proposes policy analysis and recommendations for optimal management of foreign exchange reserves.Firstly, based on Analysis of China Monetary Policy Transmission Mechanism, this paper investigates inflation effects of China's foreign exchange reserves rising, builds evaluation model of monetary sterilization effectiveness and studies the effectiveness of monetary sterilization policy and the intensity of monetary sterilization. The results show that the rising of China's foreign exchange reserves will lead to passive increase in money supply and an escalation of prices. In another word, the growth of China's foreign exchange reserves has a significant inflation effect. The monetary sterilization policy is effective, that is to say, to a certain extent the implementation of monetary sterilization policy reduces the inflation effect of foreign exchange reserves rising, but the intensity of monetary sterilization is not adequate. Moreover, the rate of monetary sterilization has become increasingly difficult to keep up with the rate of money passive supply due to the rising of foreign exchange reserves, and the over speed increase of foreign exchange reserves significantly reduces the effectiveness of monetary policy, so that our country will have to face greater inflation pressure for a long period of time.Secondly, for the negative social effects result from inflation, based on Kelly Michael model this paper builds a government utility function by introducing of inflation factor. And then, on the basis of governmental utility maximization, optimal size model of foreign exchange reserves is further established. The formula suggests that the optimal size of foreign exchange reserves is relevant to the standard deviation of export, the opportunity cost of holding foreign exchange reserves by government, the marginal propensity to import, the output-export ratio and so on. China's foreign exchange reserves have been in a severe state of excess in recent years, through comparing the difference between the optimal size and the real size of foreign exchange reserves.Thirdly, because of status that China's foreign exchange reserves is excessive and the USD has continued to depreciate, from the standpoint of reserves security, the thesis attempts to ascertain a reasonable composition of foreign exchange reserves using Black-Litterman model. Be distinct from Markowitz portfolio model which is traditional emphasized the risk-return, Black-Litterman model has introduced investors'subjective expectations of certain assets on the basis of objective quantitative calculation, and made asset allocation through the combination of the expected return in market equilibrium and the point of investors' view, so as to make the optimization results more stable and accurate. Empirical research via using this model indicates that the composition of China's foreign exchange reserves is unsuitable in present, which the proportion of dollar assets is excess in respect of the currency composition; the proportion of equity investment is too low while proportion of debt investment is too high in respect of the asset structure, furthermore, the proportion of treasury bond investment is oversize while the proportion of investment in corporate bonds is undersize.Finally, according to the theoretical models and conclusions in this paper, some reasonable countermeasures and suggestions on optimal management of China's foreign exchange reserves are putted forward.