Determination Of Appropriate Scale Of China's Foreign Exchange Reserves Based On The Balance Of Supply And Demand

In an open economy, a country's foreign exchange reserves is an important indicator to examine foreign economic relations, both as the result of macro-economy, but also an important means of macroeconomic control. By examining the foreign exchange reserves, we can understand the operation of a country's macroeconomic situation; by regulating the level of foreign reserves, we can achieve a country's external economic equilibrium. In recent years, China's international balance of payments continued to double surplus, and foreign exchange reserves substantially increased rapidly. In 2006, China surpassed Japan as the world's largest foreign reserves state. As of July 2010, China's foreign exchange reserve has reached 2.4 trillion U.S. dollars. Huge foreign exchange reserves show that China's economic advancement and the ability to withstand the international financial risk has increased greatly. However, rapid growth of foreign exchange reserves is a "double-edged sword," foreign exchange reserves is not better. Continued growth of foreign exchange reserves may have hampered the independence of monetary policy, reducing the efficiency of the country's overall economy, is facing the risk of depreciation of the dollar and many other negative effects. For our part, how to effectively manage and use foreign exchange reserves have been theorists and practical departments of great concern. The foreign exchange reserves management includes two aspects of scale management and structure management. Among them, the scale management is a prerequisite for structure management, scale management restrict the scale of management. Scale management needs to be given the scale of reserves for asset conversion and currency conversion, and conversion there is a risk in itself. Especially if the scale of the foreign exchange reserve is too large, the risk of structure management will magnify exponentially. Therefore, the key issue of structure management is how to determine the appropriate size of reserves. This paper abandoned the demand for foreign exchange reserves decision on the view that the modest size of foreign reserves is not the same demand for foreign exchange reserves, modest in scale, not only by the appropriate scale of foreign exchange reserves of foreign exchange reserve requirements, but also by the supply of foreign exchange reserves. Foreign exchange reserves, modest scale of the problem there is demand, supply of foreign exchange reserves should be the same token there is a modest scale. Foreign Exchange Reserves necessary to consider the determination of supply and demand factors. This paper draws on Keynesian IS-LM model of thinking, namely the balance of the reserve supply and demand balance, and made both supply and demand equilibrium level when the scale is the appropriate scale of foreign exchange reserves.First, the paper reviews the determination of an appropriate scale of foreign exchange reserves of various theories and related literature, an objective evaluation of the advantages and disadvantages of various theories, and introduces the framework of this study and characteristics.Secondly, we re-interpret the meaning of the Foreign Exchange Reserves and the scale of the problem in the analysis of foreign exchange reserves, moderate differences on the basis of the country, proposed to determine the size of China's foreign exchange reserves, moderate ideas.Next, the paper identified the modest scale of the supply of foreign exchange reserves. On the trade balance, foreign debt, and foreign direct investment, appropriate analysis, we found that the scale of foreign direct investment has the appropriate question. By further empirical research,we determine the appropriate of the scale of foreign direct investment, and further achieve the appropriate scale of the supply of foreign exchange.Then, we measured the moderate size of the demand by multi-factor analysis and regression analysis. By comparison, the paper selected the data of regression analysis obtained.Finally, by comparing the level of the two found modest scale, we found in most years the moderate scale of the demand is greater than the moderate scale of the supply. According to the article's criteria, appropriate scale of foreign exchange reserves is equal to the appropriate scale of demand in most years.