A Simple Study In The Growth And Proper Level Of China's Foreign Currency Reserves

China's Foreign Currency Reserves have been increasing rapidly in huge amount in the recent years.By the end of Year 2007,the reserve level has reached to an amount of USD1528.25Bn. China has thus been ranked as No.1 in the world in terms of foreign currency reserve level.The phenomenal growth has aroused strong and wide attention from media,economists and government officials in both local and foreign societies.People can't stop thinking of what is the root-cause of such a huge increase.And what is the mechanism for its continuous rapid growth? Does it fit China's economic development situation? What could be the impacts to China's macro economy?Foreign currency reserve is regarded as one of the key macro economy indicators that reflect the economic and financial ability of a certain country.It plays an important role to adjust the trade balance,maintain the currency exchange rate stability and protect the creditability of a country.With the globalization,foreign currency reserve has been playing an increasingly important role to safeguard the economy and financial security of a country.By keeping adequate foreign currency reserves,it strengthens the international settlement capability of our country,enhances the worldwide confidence in China's economy and local currency,and improves China's ability to stay away from financial risks and crisis.In addition,it provides strong assurance for China to adjust its economy structure,implement critical reform strategies,and promote economy development.However,being the central bank's external assets,the accumulation of the foreign currency reserves is at the cost of more RMB occupation.It brings difficulty in maintaining independent monetary policy,incurs pressure of inflation and RMB appreciation,which negatively impacts China's economy stability and development. And on the other hand,with enormous international capital flooding into our country,China economy deepens the reliance on foreign capital,which lowers the domestic economy safety degree.The enormous growth of foreign currency reserves is thus interpreted as a "two edges' sword".From the above consideration,this paper studies the growth and proper level of China's foreign currency reserves.It starts from the changes in the foreign currency reserve scale,and analyze the reasons of the reserve growth.By then studying the structural factors of the reserve growth and two-fold effect on the China economy,the paper moves on to an application of traditional foreign currency optimal level theories.It then uses the "Factor Analysis Method" and studies the current proper level of China's foreign currency reserves through quantitative analysis based on the reserve needs at the current stage.And in addition,by looking at the features of China's foreign currency reserves,as well as the long-term development needs,the paper also studies the long-term reserve demand by qualitative analysis.At the last but not least,the author tries to explore and propose some measures to cope with the enormous growth,proper level maintenance and management of foreign currency reserves.