China's Foreign Exchange Reserves, An Appropriate Scale

Until the end of 2009, China's foreign exchange reserve has reached 2.3992 trillion U.S.dollars. The sufficient foreign exchange reserve ensures national exchange rate stability, resists the impact from the outside. However, foreign exchange reserve's explosion has the negative influence to the domestic macro economic. In the meanwhile the coordination between rapidly growing foreign exchange reserve and the domestic economic operation has become a tougher problem, and this brought the management of foreign exchange reserve pressure. How to face the pressure of RMB appreciation, to better promote economic development, all we need to solve the appropriate size of foreign reserves.This paper investigates the appropriate scale of China's foreign exchange reserves. The main problems of foreign exchange reserves are to determine the appropriate scale of reserves which is suite for our country's economic. This paper would carry on a series of empirical analysis to the primary factors which affect our country foreign exchange reserve scale. This article uses the Agarwal model to calculate the scale of our country's foreign exchange reserves from 1994 to 2009 years. From the result we discover that this model cannot well explain our country foreign exchange reserve growth. Based of objective evaluation and reference from the predecessor, the article makes innovation on the traditional model which takes in a series of factors such as transactional needs, the debt redemption demand, the preventive demand, and the foreign investment profit remitted demand and so on. And use this new model to calculate the foreign exchange reserves scale from 1994 to 2009 years. The result indicates that the scale of China's foreign exchange reserves excessive, and has surpassed the moderate reserve scale upper limit.China's foreign exchange reserves increases sharply originates from"double favorable balance"of the international payment balance. This thesis carries on the empirical analysis for the various factors which cause the"double favorable balance". Selected imports, exports, foreign direct investment, foreign debt, foreign exchange amount of increase for empirical testing. The results show that these are the main reasons leading to surge in China's foreign exchange reserves. This paper proposes some policy suggests respond to excessive foreign exchange reserves in the light of the empirical analysis. Such as innovation management, establish the "two-possession mechanism", strengthen the monitoring efforts to the"international hot money", increase the exchange rate elasticity and enhances the RMB's marketability degree and so on. This paper hopes to provide a reference to China's foreign exchange reserves management, enhances the foreign exchange reserve economic efficiency and social efficiency.