Studys On China's Moderate Foreign Exchange Reserve

Foreign exchange reserve concerns the governments' ability of adjusting balance of payment and stabilizing exchange rate. Also it is the guarantee for getting international loan and resisting financial risk. Therefore government is called to keep certain scale of foreign exchange reserve in order to answer the common international balance of payment and potential risk. However, it is still a disputing issue to keep an optimum reserve and minimize the holding cost under the principle of security, liquidity as well as profitability. Considering our nation's foreign exchange reserve has uprushed from 51.62 billion US dollar in 1994 to 1.066344 trillion in 2006, although huge foreign exchange reserve is help to ensure the smooth trend of the balance of payment and the international trades, it has also bring much burden to the economy development. So it's of great practical significance for us to study the optimum foreign exchange reserves and the solution solving the management and modulation problems at present.Considering China's huge foreign exchange reserves this paper first analysis the importance of keeping a moderate reserve. Then we compare the traditional foreign exchange reserve theories including proportion standard, cost-benefit method, quality analysis method, target space standard and bureau theory, and analysis the core mechanism of every method in the aim of finding the appropriate standard to evaluate our nation's foreign exchange reserve combining with the practical situation. Basing on the former work, we choose the cost-income method and modify the model by introducing the variable of paying foreign debt to analysis and measure our nation's moderate reserve. And the result indicates that our moderate reserve is about 404.08 billion US dollar, which is only half of the real reserve. At the same time we analysis the disadvantage to our country coming with the excess reserve scale and discuss the general reasons for the uprush especially our nation's proper reasons. Finally correspondence suggestions are proposed according to the analysis results.