Appropriate Scale And Management Optimization Of China's Foreign Exchange Reserves

As the most important part of international reserves, foreign exchange reserves reflect a country's ability of adjusting balance of payments and stabilizing the foreign exchange market, which are also symbols of economic and financial power. China's foreign exchange reserves have maintained rapid growth since the exchange rate system reform in 1994. In 2006, China replaced Japan as the world's largest country in foreign exchange reserves. At the end of 2010, China's foreign exchange reserves reached 28473.38 billion US dollar.China's huge foreign exchange reserves caused widespread controversy. On the one hand, the huge foreign exchange reserves play a "buffer" role in China's financial system. On the other hand, the cost of holding huge foreign exchange reserves is very high. It easily leads to structural inflation, and affects the independence and effectiveness of monetary policy. Therefore, it's very important to determine the appropriate scale of foreign exchange reserves and take effective management of foreign exchange reserves.Based on review of the study on reserves'appropriate scale by scholars and analysis of the development process and situation of China's foreign exchange reserves, this paper did an empirical study on China's foreign exchange reserves in 1994-2010 by using the modified Agarwal model, and then gave advice to China's foreign exchange reserves management. The results show the actual size of China's foreign exchange reserves began to exceed the appropriate scale since 2005, and this trend won't change within a certain time; the demand structure of China's foreign exchange reserves have changed greatly; we can improve the effectiveness of China's foreign exchange reserves management and use the excess foreign exchange reserve by taking a wide range of investment strategy, strengthen management risk control, improve management of investment company and investing to strategic industries.