An Empirical Research On The Optimal Scale Of China's Foreign Exchange Reserve

China is integrating as an important player in the international economy with its progress of reforms and open market economic policies, and with the rapid development of the world trade and economic integration. At present, the flow of international capital is accelerating. Although this facilities the development of the world economy, but it also makes the economy to be more volatile and the financial crisis is to occur more frequently. Foreign exchange reserve is an important index for measuring the size of a nation's foreign trade. The purpose of foreign exchange reserve is not only to ensure the payment for the import, but also prevent the negative effect of the capital flow, stabilize the domestic foreign exchange rate and improve the confidence of local and foreign investors. Therefore, foreign exchange reserve plays an important role in avoiding speculative capital attacks and stabilizing domestic economy. The discussions on the sufficiency of foreign exchange reserve and effective management of foreign exchange reserve have become the major research topics in international finance field. China succeeded in the reform of foreign exchange management system in 1994. It realized the convertibility of current account in 1996, while the amount of foreign exchange reserve continuously keeps increasing. It amounted to USD＄941.15 billions in 2006,which effectively helped China avoid Asian financial crisis and stabilize the foreign exchange rate. But beyond the continuous increase in the amount of foreign exchange reserve, the management policies on the foreign exchange reserve not only affect the efficiency of using the foreign exchange reserve, but also affect the whole efficiency of using the foreign exchange management system. The management on the foreign exchange reserve draws a lot of attention of government and scholars and substantial amount of research has been done on this.While most literatures on the foreign exchange reserve research is just focus on the static amount, in fact, the management of the foreign exchange reserve is a dynamic concept, it varies with the international and domestic economic environment changes. The types of demand for the foreign exchange reserve and the influence of the foreign exchange reserve on economy are varied because every country has different economic environment and different purpose of having the foreign exchange reserve. Therefore it is vital for every country or economies to make the management policies on the foreign exchange reserve in order to keep an appropriate amount of the foreign exchange reserve according to their own situation. The purpose of this paper is to research foreign exchange reserve management. The models to measure the amount of China's foreign exchange reserve are constructed on the basis of the systematic research theories, considering the reality of China. It also makes some suggestions on China's foreign exchange reserve for the policy makers.