Study On Optimization Of Foreign Exchange Reserve Management In China

The foreign exchange reserve is the main material base to melt the deficit of balance of payments, maintain the stability of the exchange rate of the currency, and guarantee the credibility of the country in the international society. Chinese foreign exchange reserve is steadily increasing since the foreign exchange management system reformation in 1994.Especially in recent years, it has increased significantly. By the end of 2008, Chinese foreign exchange reserve has reached 1.95 trillion dollars. And China is the country with the biggest scale of foreign exchange reserve.As the scale of Chinese foreign exchange reserve increased rapidly, the international payments capacity and overall national strength significantly increased. But too fast increase of reserve also brings the pressure of inflation, the restriction to the independent right of the central bank currency policy, and the pressure of revaluation of RMB. It harms the sustainability of China's economy in the long run, and it is a challenge to China's harmony and stability. With the outbreak and spread of the global financial crisis in 2007, Chinese foreign exchange reserve has shrunk substantially, and keeping the value of foreign reserve assets is a practical and important issue. The optimization of foreign exchange reserve management is becoming an important part of China's macroeconomic strategy.Therefore, optimizing the structure of foreign exchange reserve, applying reasonable channels to expand foreign exchange reserve, and improving Chinese foreign exchange reserve earnings become an important issue, when the safety of foreign exchange reserve is secured. In this dissertation, some problems about the management and optimization of foreign exchange reserve are analyzed and discussed.First of all, the dissertation introduced domestic and foreign researches about scale management, structure management, and operation management of foreign reserve. In the existent researches, theories on scale management and structure management are comparatively rich. Different methods are employed to discuss the relevant issues from different perspectives. The research on operation management is comparatively scarce. Based on the present management state, the dissertation presents ideas on the Chinese foreign exchange management optimization. Secondly, through an empirical analysis, the dissertation presents a literature review on Chinese foreign exchange scale management, structure management, and operation management. The dissertation believes the scale of Chinese foreign exchange reserve is optimal, and it keeps a long- term and even relationship with the rapid growth of economy, foreign direct investment, and import and export. The main problems in the structure management are: the asset structure is singular, the rate of return is low, and etc. The performance of operation management is not as promising. The dissertation believes the present state is caused by the shortcomings of management mode. And the reformation of the management system and mechanism is urgent.Thirdly, the dissertation analyzes the dilemma of Chinese foreign exchange reserve management with the method of qualitative combined with quantitative. Based on empirical tests and analyses, the dissertation believes the big scale of foreign exchange reserve brings high cost, high risk, and serious threat to economy. The dissertation analyzes and tests the relationship between CPI, money supply, exchange rate, and foreign exchange reserve by adopting the advanced econometrics model (co-integration test, impulse response analysis).And it finds that big scale of foreign exchange reserve has some negative impacts on macroeconomic. Under the impacts of international economic environments, the structure management and operation management face many difficulties.Fourthly, as to the dilemma in Chinese foreign exchange reserve management, the dissertation proposes optimization strategy.In the scale management aspect, empirical tests show that though Chinese foreign reserve fluctuates as the result of financial crises, the increment is still stable. The present main task is to prevent dramatic fluctuation. To achieve this purpose, strict supervision and file classification should be implemented in the foreign fund sources. Unblocking, instead of strict control, should be the main method.In the structure management aspect, the dissertation believes that under the background of financial crisis, and depreciation of US dollar, a multiplex management is the primary task. From the aspects of currency combination and asset portfolio, the dissertation draws conclusion on what the currency combination should be. And from the security point of view, gold and oil should be added to assets'composition of Chinese foreign exchange.Under the law of marginal benefit declining, as the size of foreign exchange reserve increases, how to effectively manage the foreign exchange reserve also becomes difficult. Therefore, in order to guarantee the profitability of foreign exchange reserve, China has to resolve urgent problem for high stock of foreign exchange reserve by actively exploring effective method in operation, strategies and other specific matters. This is also the aim of this dissertation. Bringing in experience from international experience and according to our own present situation, this dissertation argues that China should adopt a positive, market-oriented business-operating model and strategy. Although the Chinese government has taken a breakthrough, the result is not satisfactory and a lot of unsatisfactory aspects still exist. In order to change this situation, from the State, enterprises and individuals point of view, this dissertation poses six currently practicable options.The overall idea is to improve the return rate of foreign exchange reserve and to serve national economic construction. In order to achieve better operating results, the specific implementation should be accompanied by effective supervision and operation efficiency evaluation mechanism.Finally, a perfect system and mechanism is the key point to success. The dissertation puts forward the idea of reforming China's existent foreign exchange reserve management system and perfecting foreign exchange reserve legislation by analyzing domestic and international macroeconomic environment, and in the light of successful foreign reform experiences.