Empirical Analysis Of The Appropriate Scale Of China's Foreign Exchange Reserves

As the vital reserve assets in the international reserve system, the foreign exchange reserve is one of the indicators of a country's overall economic strength. In recent years, China's foreign exchange reserve has enjoyed a continuous and rapid growth insofar as its actual scale is concerned. The immensity of foreign exchange reserve has drawn wide attention within academic circles. Therefore, it'll help guarantee a smooth and stable development of China's national economy to set up a reasonable scale for the foreign exchange reserve.This paper follows a line of considering China's foreign exchange reserve in macro-economy and tries to study the relations between exchange reserve and the individual variables affecting its supply and demand. This paper mainly deals with the question of whether China's foreign exchange reserve meets China's economic development requirement, or in other terms, what is the appropriate scale of China's foreign exchange reserve? Apart from the introduction and conclusion part, this paper falls mainly into to two parts:In the first part, a qualitative analysis of the scale of China's foreign exchange reserve is made. First the definition of the scale of the foreign exchange reserve is given, and thereafter factors affecting the supply and demand of the foreign exchange reserve are demonstrated. Based on this, a qualitative analysis is carried out regarding issues of the scale of foreign exchange covering the formation of the foreign exchange reserve, the utility of the foreign exchange reserve, and the international comparison of the foreign exchange reserve.In the second part, a quantitative analysis of the scale of foreign exchange reserve is made. Based on the foregoing qualitative analysis, the conclusion can be reached that there are seven main variables affecting the supply and demand of the foreign exchange reserve; namely GDP(Gross Domestic Product),DEB(Debt External balance),FDI(Foreign Direct Investment),A(average annual exchange rate),IP(Total import value),OP (Total export),M2. Thereafter, by means of co-integration, this paper selects the basic variables which have long and steady interrelations with foreign exchange and sets up VAR model and vector error revision model (VECM). The basic conclusion is that: there is a steady equilibrium between relations among Chinese foreign exchange reserve (FR) and IM,OP,and FDI, and that the influences from FBI and OP to FR are both positive, whereas IP are negative.This paper casts aside the often quoted presumption that the actual hold reserve is the desired reserve and, on the basis of unbalanced economic system, establishes the dynamic adjustment model for the foreign exchange reserve. we estimated the optimal scale of FR and compared it with the actual scale. Conclusions are that that despite the continuous growth of the absolute volume of China's foreign exchange reserve, it suits the high speed of China's economic development.