Diversification Of The Country's Foreign Exchange Reserves Management

In the end of 2010, China's foreign exchange reserves have exceeded 3 trillion U.S. dollars, continuing to rank the largest one in the world, but the large number of excess foreign exchange reserves has become a serious problem for China's economy. First, the high foreign exchange reserves results in a great pressure on the appreciation of the RMB, which created negative impact on the export industry. Second, the excessive reserves influenced the flexibility of monetary policy and raised the costs of central banks macro-control. Again, a large part of foreign exchange reserves accounted for dollar assets (particularly U.S. Treasury bonds), therefore, the foreign exchange reserve shrinks due to the continuous depreciation of the dollar against the RMB. Finally, the rapid growth of foreign exchange reserves would change the original structure of base money; further exacerbate inflationary pressures in China. Therefore, changing the original single mode of foreign exchange reserves management to exploit a multi-level management of foreign exchange reserve is an inevitable choice for China. Liu Mingting's master thesis has done a systematic study of this area, which presents a great theoretical and practical significance.Firstly, with the microscopic analysis of corporate finance of China's only sovereign wealth fund - China Investment Company Limited (CIC), the paper studies the capital sources, the funding costs and the business trajectory of CIC, and then concludes the investment portfolio structure, the profitability and the potential problems in CIC. Subsequently, the paper introduces the multi-level management experience in foreign exchange reserves of two countries, Norway and Singapore, which are considered as the model for the two typical investment strategy when conducting foreign exchange reserves, the financial portfolio management strategy and the strategic Investment strategy. Furthermore, the paper reveals the similarity and the diversity of experience between the two countries' foreign exchange reserves investment system.Subsequently, the paper introduced in the Finance and Investment portfolio theory and behavioral finance views in the wealth management. On one hand, under the guidance of portfolio theory, the foreign currency reserve assets would achieve a moderate returns and risk diversification due to the portfolio management; the other hand, to reflect the behavioral finance point of view, the objectives should be set according to the different investment needs of the investors, namely the pyramid-style management.Finally, the paper put forward some policy recommendations. The investments of China's foreign exchange reserves should be built on the controllable risk, also take into account the strategic role of sovereign wealth funds. Therefore, we should separate the business and department of the organization of CIC and Huijin Company, which could enable Huijin Company to act as an independent representativeness of national assets. At the same time, as a financial investor who truly meets the investment objectives, CIC should focus on the overseas diversified portfolio investment to control the investment risks of China's foreign exchange reserves. In addition, another independent SWF should be established, focusing on strategic investment to fulfill the will of the country, such as the investment industry of energy, mining and real estate, etc. Eventually the construction of a multi-level foreign exchange reserves management would be achieved to meet a wide range of benefits and risk requirements of China.