China's Foreign Exchange Reserves, An Appropriate Scale

Since the year 2006, the volume of China's foreign exchange reserves has been the largest in the world for four years. By the end of December 2009, China's foreign exchange reserves amounted to 2399.152 billion US dollars. After China's reform and open policy, as to the trade surplus,FDI surplus,the related systems, China's foreign exchange reserves have been changing in phases. In the first period, they are not enough, in the second period, they are moderate, in the last period, they are excessive and they increase fast. The redundant reserves will be good to the economy,meet the need of purchasing foreign goods,keep the reputation of China,avoid financial risks,accelerate the process of the Renminb's free convertibility; the overdue reserves may lead to economic bubble,instable economy,opportunity cost. Because of these effects, we should consider whether the reserves are moderate to China? That's the most important part in this essay. To use ratio method and modified Agarwal model to define the moderate scope of reserves and find out that China's reserves are excessive. Based on above, there should be two policies to solve the problem, the first one is to use policies keep the moderate reserves, for example, adjust the structure of reserves,encourage imports,improve FDI,adjust mechanism of exchange-rate determination,make it easier for individual and firm to use reserves; the second one is to make full use of the overdue reserves, such as open up new ways of investing reserves,learning from foreign countries set up new mechanism of managing foreign exchange reserves.