A Study On The Optimum Scale Of China's Foreign Exchange Reserve

China's foreign exchange reserve stood at 1.202 trillion U.S dollars by the end of March 2007 with an increase of 37.36% compared to the same period of last year, said by the first quarter financial report published by People's Bank of China on April 12, 2007. With rapid growth in recent years, China's foreign exchange reserve reached 609.9 billion U.S dollars by the end of 2004, 818.9 billion U.S dollars by the end of 2005, ranked first in the world by the end of February 2006 and reached 1.0663 trillion U.S dollars by the end of 2006. Consequently, there is a growing concern about huge foreign exchange reserve and people begin to wonder how much foreign exchange reserve is at an optimum scale for our country.Although there is no uniform standard to the number of a country's optimum foreign exchange reserve in theory and practice, the lowest limit of foreign exchange reserve is internationally definite. There is no well-defined benchmark for the amount of China's optimum foreign exchange reserve, but the negative impact of current high level of foreign exchange reserve has become more and more obvious. China's current foreign exchange reserve resulted in huge RMB counterpart of foreign exchange reserve, created distortions in China's monetary policy, aggravated serious excess liquidity which distorted many economic behaviors, increased the pressure on the RMB revaluation, made China face the"high savings dilemma", caused a waste of financial resources and had an impact on the national economy development.To solve above problems, this thesis intends to establish a model about China's optimum foreign exchange reserve through in-depth study. This thesis falls into the five parts as follows:Chapter 1 introduces the background and significance of this research, the methods and contents of this thesis.Chapter 2 summarizes international reserve and foreign exchange reserve, then analyzes the meanings of foreign exchange reserve optimum scale from several points of view, and finally reviews traditional theoretical analyses of foreign exchange reserve optimum scale.Chapter 3 analyzes the optimum scale of China's foreign exchange reserve with analytical method and model of traditional theory.Chapter 4 discusses the optimum scale of China's foreign exchange reserve with fixed Agarwal model, then analyzes the influence of the excessive scale of China foreign exchange reserve on China's economy, and finally comes to the conclusion of optimum scale of China foreign exchange reserve.Chapter 5 puts forward the basic ideas of reserve management and the policy propositions for scale management of China's foreign exchange reserve. This thesis maintains that they are helpful for keeping China's reserve scale at an optimum level.Through in-depth research this thesis concludes that China's foreign exchange reserve held by the state is excessive and establishes a model of optimum scale of China's foreign exchange reserve.