The Study On Foreign Exchange Reserve's Scale Of China

China succeeded in the reform of foreign exchange management system in 1994, anti thenbegan to carry out the single, managerial, floating foreign exchange rate. It realized theconvertibility of current account in 1996, while the amount of foreign exchange reservecontinuously keeps increasing. It amounted to USD$8188 billions in 2005, which effectivelyhelped China avoid Asian financial crisis and stabilize the foreign exchange rate. But beyond thecontinuous increase in the amount of foreign exchange reserve, the management policies on theforeign exchange reserve not only affect the efficiency of using the foreign exchange reserve, butalso affect the whole efficiency of foreign exchange management system. The management onthe foreign exchange reserve draws a lot of attention of government and scholars and substantialamount of research has been done on this.Some traditional models on measuring the foreign exchange reserve are introduced. Theycan be classified into three kinds: proportional analysis method;reserve demand function method;and cost-benefit method. The proportion method is the most routine method in measuring thesuitability of the foreign exchange reserve by using some ratios of reserve to some economicvariables. The reserve to GNP (R/GNP) is most popular, most often used ratios are reserve toimport (R/M), and reserve to debt (R/D), among them, the first one is most popular. Reservedemand function method uses the multi-regression and correlation analysis to construct thereserve demand function. It also analyzes the independent variables that affect the reserve level.Cost-benefit method is based upon the basis of profit maximizing theory of microeconomics. Theabove three methods all have their own advantages and they measure the suitable size the foreignexchange reserve from the different aspects.Then the paper focuses on the foreign exchange reserve scale of China, study reasonablereserve scale of China nowadays and the selection of policy. At first this paper introduces thegeneral knowledge of foreign exchange reserve and theoretical summary related to foreignexchange reserve. Then, referring to relevant model, a new moderate determination model isconstituted according to the reasonable demand of the foreign exchange reserve and other factors.This model adapts to practical status of China. It is used to analyze China's 1994-2005 foreignexchange reserves. The result shows that foreign exchange reserve is excessive after analyzing.Base on this result, the causes of foreign exchange reserves increase and negative influences aredeeply analyzed. At last, the author points out it should not adopt extreme policy adjustment,although current scale of foreign exchange reserve is large then normal. The author puts forwardrelated policy measures and reformable advice to alleviate side effect of foreign exchangereserve and assure economy's normal move.