The Research On The Currency Composition Management Of The Foreign Exchange Reserve In China

Under the open economy condition, the foreign reserve is usually used to observe one country's external economic relations. Since the financial crisis in 1997, the management of currency composition has already become one of the important parts of foreign exchange reserve management. Up to February 2006, China's foreign exchange reserve has reached 853.6 billion US dollars, and China has become the country which has owned the largest amount of foreign reserve in the world. In the crisis-ridden international financial market, massive foreign exchange reserve also means that the risk undertook is immense. Rational currency composition is the fundamental way to maintain and increase the value of foreign exchange reserve. This paper treats the management of reserve currency composition as a multi-objective decision-making process by using the Analytic Hierarchy Process (AHP).In this paper, we first analyze the institutional framework and current status of reserve currency composition management in China, pointing out it's too single. Then introduce the Asset Portfolio Theory and AHP into the management. And then we make use of AHP to manage the currency composition of foreign exchange reserve. On one hand, we make foreign trade structure, foreign debt structure, risk-yield of reserve currency and a country's exchange rate system as criterion layer. On the other hand, based on the analysis of the world's reserve currency, project layer is formed in accordance with principles about the selection of reserve currency. Then we form the AHP model of China's management of reserve currency composition. Later on, on the basis of the analysis of some date, we construct several judgment matrixes to get the solution of the model above-mentioned. Among them, we specially use the asset portfolio theory to solve the problem of determining the currency composition under the"risk-yield"criteria. Finally, with the analysis and results, we propose some ways to adjust our reserve currency composition.In particular, this paper put forward managing reserve currency composition with AHP, which only provide an analytical framework. In the actual operation, we may set elastic proportion spans with definite results calculated, and according to the variety of each influence factor, moderately make the adjustment at the right time to achieve more dynamic alignment and a more flexible management mechanism.