The Research On Risk And Countermeasure Of China's Tremendous Amount Of Foreign Exchange Reserves

Foreign exchange reserve is an important indicator in an open economic system. For most of the countries in the modern world, foreign exchange reserves are essential and vital economic resources. It is a significant reference to measure the comprehensive strength of a country. Up to December, 2009, Foreign exchange reserve of China is high to $23991.52 billion, steady at the first position of the world. It does have positive effect to the macro economy, but at the same time, it also gave the economy negative effect. In order to eliminate the negative effect to macro economy because of high foreign exchange reserve, this article will analyses its form principle, research its rational scale and optimize its structure. And, we will give out some practical suggestion in policy. My paper is divided into 6 parts.The first part is introduction. The main content in this part is research the background, the meaning, research method, and the structure arrangement. The scale of foreign exchange reserve in China is extremely huge, and it is increasing continuously, which makes more and more effect on the macro economy. It is meaningful to study the risk of foreign exchange reserve in China. We can find out how the high level foreign exchange reserves effect on the macro economy, furthermore, we can also give the policy maker some practical suggestion. By understanding the research actuality internal and external, our article is willing to achieve three goals: first, by researching the reason and actuality of foreign exchange reserve in China, we want to analyses the reason of the huge scale; secondly, study the negative effect that foreign exchange reserve gives the macro economy, and the devalue risk of its own, so that we can give out some suggestion for the government; thirdly, we should reference some practical experience on huge scale foreign exchange reserve management, in order to argue some policy suggestion that match to the Chinese condition.The second part analyses the history and current situation of foreign exchange reserve. Foreign exchange reserve is a kind of international reserves in essence; its scale is closely related to the level of economic development of one country, the foreign trade intercourse and the financial system. In the early days of foundation, China copied the Soviet model, practiced the planned economy, and had small foreign exchange reserve. But at the end of"cultural revolution", the national economic began to be improving, the economic system transformed from planned economy to market economy step by step, and the foreign exchange reserve also increased. In 1990, after the political disturbances, RMB was depreciated in order to stimulate exports. As a result of RMB's devaluation, the balance of payments deficit was reversed and the foreign exchange reserve increased rapidly. After the reform of RMB exchange rate system in 1994, the scale of foreign exchange reserve was enlarged. Combined with yearly increasing balance of payments surplus and foreign investments, China finally has the largest foreign exchange reserve in the world.The third part analyses the scale risk of huge amount of foreign exchange reserve.Based on Triffin ratio method, we can conclude that the foreign exchange reserve of China is excessive at this stage; Further, the part analyses of the negative effect of huge amount of foreign exchange reserve on macroeconomic: weakening the Central Bank's controlling force on money supply, causing the threat of inflation, binging the irrational use of resources and RMB value increasing is caused by attracting international floating capital.The fourth part, the structural risk of China's plenty of foreign exchange reserve. Based on three principles and portfolio theory, this section analyses the rational structure of the foreign exchange reserve assets. We can conclude that in order to improve the risk prevention capability China should reduce its dollar holdings, increase the proportion of Euro assets, yen assets and the other assets.The fifth part is the management experience from foreign countries. Japan and Singapore has huge amount of foreign exchange reserve too, the management method from these two countries can give us enlightenment: First of all: we should clear the purpose of foreign exchange reserve management combined with the condition of our country. China is now facing the great task of changing economic structure, lacking a lot of pivotal nature resources and core technology. If foreign exchange reserve can be used in a standard way and under strait risk management, it can make greater contribution. Secondly, clear the investment subject will help a lot to the efficient management of foreign exchange reserve. China should initiate more investment subjects according to the different needs of foreign exchange reserve. The founding of China Investment Corporation can be regarded as the first step of it.The sixth part is how to eliminate the risk of huge amount of foreign exchange reserve. Firstly, boost domestic demand, so we can make China's economy into twin-engine driven instead of single-engine driven, which will inhibit the excessive growth of foreign exchange reserve. Currently, China's economic growth has over reliance on export, which results in balance of payments surplus. If the economic structure is balanced and domestic demand is increased, the pressure of increasing of foreign exchange reserve will be decreased. Secondly, we should reduce dollar-denominated asset and achieve diversification of currency allocation. It is not difficult to find out that most of China's foreign exchange reserve is U.S. dollar assets. The single structure of reserve assets has caused great risk of writing down. In short-term, U.S. dollar will still be strong in the international monetary system, so the only way to reduce dollar-denominated asset is gradual reducing. Thirdly, we should use the reserve rationally to make it play a more active role. The usages could be such as enhancing the discourse power in economic negotiation, purchasing scarce technology and resource,participating in the pricing of bulk product will also help China's economic development. Fourthly, promoting the process of internationalization of RMB is the final method to resolve the problem of China's foreign exchange reserve. But according to the international economic environment it is hard to achieve in short order. However, some countries and regions around China have begun recognized RMB as settlement currency, which is a good beginning of the internationalization of RMB. Companion with the internationalization, China will get rid of the strong dependence of U.S. dollar, the problem of excessively huge amount of foreign exchange reserve will be solved in a certain extent.