Optimal Currency Composition Of China's Foreign Debt

Throughout the 1980s, many developing countries had been attacked by external debt crisis, most of them were caused by unreasonable currency composition of external debt, if they could adjust their currency composition of external debt periodically, they will be able to avert these crisis. In July 21st, 2005, our country reformed the RMB exchange rate system, RMB rate will never peg to US dollar, but adopted a system, which refers RMB rate to package currency, bases the exchange rate on the relationship between supply and demand in market, and is a dirty float rate. Then, the marketization of RMB rate increased the fluctuation of exchange rates, by which RMB exchanges to foreign currency increased the exposures to exchange rate and external debt had existed already. Stijn Claessens(1988) shows, for developing countries, fixing their optimal currency composition of external debt can take precautions against exposure to external debt.Here we employ the optimal currency composition of external debt model established by Stijn Claessens(1988) to analyze our country's optimal external debt portfolio. The estimation of this model refers to mutual influences among dollar rate, Japan yen rate, Euro rate, Korean won rate, Australia dollar rate, UK pound rate, Canada dollar rate and HK dollar rate, and covariances between currency exchange rates and their trade terms. The mutual influences among these fluctuations of exchange rates can be estimated by multivariate GARCH(1,1) model on them. For so many coefficients to be estimated, we adopt a new method to estimate this model, called Genetic Algorithm. The first result shows that, there are large correlation coefficients among Euro rate, Canada dollar rate and Australia dollar rate, and also between US dollar rate and HK dollar rate, which make most parameters estimates in the Multivariate GARCH(1,1) model modeled on these eight rates are insignificant. So, this paper will use Euro rate to represent Euro rate, Canada dollar rate and Australia dollar rate, US dollar rate to represent US dollar rate and HK...