Correlation Studies Between Foreign Exchange Reserves And Exchange Rate Of RMB

According to data of the State Administration of Foreign Exchange, as of the end of December 2010, the foreign exchange reserves had reached＄2,847.3billion. Compared with＄73,597 billion in 1995, the foreign exchange reserves had increased nearly 40 times. However, Chinese foreign exchange reserve is mainly used for buying government bonds of U.S. dollar. With the massive accumulation of foreign exchange reserves, appreciation of the RMB makes reserves facing enormous risks.Firstly, this paper analyze two aspects:the relationship between foreign exchange reserves and exchange rate movements, foreign exchange system reform and the evolution. It deduces that the formation of foreign exchange reserves closely relates exchange rate regime and exchange rate.Secondly, by analyzing lessons of different countries adjusting foreign exchange reserves and exchange rates to deal with crisis, it is found that exchange rate instability will make the economy pay the price in open economies. Foreign exchange reserves play a vital role to maintain exchange rate stability.On the basis, it adopts the cointegration theory and error correction model to make empirical analysis the correlation of foreign exchange reserves and exchange rate. The empirical results show that:in the long run, there is equilibrium relationship between foreign exchange reserves and the exchange rate. in the short period, short-term deviations adjust to the long-run equilibrium. Foreign exchange system reform has a significant impact on Chinese foreign exchange reserves.Finally, this paper put forward policy recommendations in aspects of enhancing exchange rate flexibility, optimizing the structure of foreign exchange reserves, RMB internationalization and so on.