Moderate Foreign Exchange Reserves In China

The western economic researchers began to study foreign exchange reserve (FER) a long time ago. Under Bretton Woods System fixed exchange rate was executed and US dollar dominated international monetary system. Foreign exchange reserve played an important in making up for the balance of payment and stabilizing exchange rate. The foreign exchange reserve was hold mainly as US dollar assets. The academic circle focuses on studying the suitable FER scale and worked out many theories and metric models. The theory that FER that can support three months import is the suitable scale raised by R. Triffin was acceptable comprehensively. Since 1970s along with the development of mathematical economy, many economists have been trying to set up reserve-demanding function through mathematical model to determine the suitable scale of FER. It was the first time to analyze the respective reserve-demanding functions depending on the different situations of developed and developing countries. Cost-profit analysis opened a new door for reserve-demanding metric research and also brought international reserve theory into a new stage that FER could be estimated by a comparatively precise procedure.Since Foreign exchange reform in 1994, FRE of China has increased dramatically. By the end of 2005 FER scale has reached 818.9 billion. Facing such a gigantic scale some people are happy for this but some are worried about this. Because on one hand such a large number of FER indicates our country has a high ability to make external payment, adjust the balance of payment and intervene into foreign exchange market. The large scales of FER and FDI bring such a hardly estimated value in the expectation of the speculators and the public. They are also the vital reason for our country to confront Asia finance crisis in 1998. On the...