A Study On The Impact Of Foreign Exchange Reserve On China Currency Stability And Policy Operation

Since 1994, China's foreign exchange reserves continued to grow rapidly. While the current account's surplus, the capital and financial account is also maintained a favorable balance as a result of foreign direct investment , double-surplus is the basic characteristics of China's foreign exchange reserves. The rapid growth of foreign exchange reserves press hard upon China's base money supply, the money supply, and inflation. And the high level of foreign exchange reserves also resulted in upward pressure on exchange rates. So the central bank had to write-off and intervene the foreign exchange marcket.This paper,using China's huge foreign exchange reserves as a starting point and a combination of theory and empirical methods,has systematically studied various aspects of the foreign exchange to macro-economy.It include five chapters:Chapter 1 puts up the question .This chapter focuses on the research background ,research significance,main contents and methods.Chapter 2 analyzes the growth of China's foreign exchange reserves and the development stage,using data and charts.And the development features were summurized.Chapter 3 firstly analyses the mechanism of foreign exchange reserve to base money,then using the method of empirical analyses how the base money is affected by the funds outstanding for foreign exchange,and the result indicates a great impact. Foreign exchange reserves also influence the structure of base money,because the funds outstanding for foreign exchange inevitably squeeze the other way. Money supply relates to money base and money multiplier.This paper analyses the relationship of money supply and foreign exchange reserve with the method of cointegration. Chapter 4 analyzes the foreign exchange reserves, inflation and exchange rate effects. The results show that foreign exchange reserves do not have a significant impact on inflation. However, the growth of foreign exchange reserves,put significant upward pressure on exchange rates. Chapter 5 analyzes the impact of foreign exchange reserves from the central bank monetary policy point of view. In order to maintain exchange rate stability, the central bank had to write-off incase of excess liquidity,the mostly used tool is open market operations in which the central bank bills are the most important tool.This paper conducted a detailed analysis on the bank's moneytary policy and put forward four suggestions.