On The Cause Of Formation About China's Holding Mint Forex Reserve From Trade And FDI Perspective

Until the end of 2007, China's forex reserve amounted to 1.52 trillion US dollar. Mint forex reserve is a two-edged weapon, and it causes broad attention from the society. How to reduce the risk of holding a large amount of forex reserve and take full advantage of them have become a hot policy topic. But before instituting specific policies, we must find out the reasons why China's forex reserve has been increasing so rapidly in order to get where the rub is.Firstly, this paper introduces some theories that related to the accumulation of forex reserve, and puts more emphasis on the three kinds of theories, Save and Investment, Modern Mercantilism and Financial Mercantilism, International labor division, which study from different and special perspectives.Then, it analyzes the historical transaction records under the sub-account of balance of payment of sheet, and gets the point that trade account and FDI account are the main sources of forex reserve. Based on the analytical result and the three kinds of theories, we study the causes of formation about China's holding mint forex reserve in a deep way. And the results show that the factors, the unbalance between investment and save, mercantilism policies that China has adopted, international labor division, created large trade surplus. But the reason why the FDI surplus persists lies in the fact that multinational companies produce goods and allocate resources in the process of globalization, and they provide the supply of FDI, and China get the demand of FDI because of the fragility of domestic financial system that causes the inefficacy of transformation from save to investment. These factors promote the surplus of our balance of payment, and make China's forex reserve historical high.Finally, the paper discusses the negative effects of China's holding a large amount of forex reserve and the counter-measures of how to manage that high amount of reserve. Through a sophisticated analysis, we hold that the rapid increase of forex reserve pushes the high pressure of monetary policy of central bank, and affects the efficacy of monetary policy and strengthens the anticipation of appreciation of RMB exchange rate, and increases the risk of foreign exchange and the management cost of forex reserve. Thus, the government should adjust the investment and management policy and accelerate the development of capital market.