Study On The Appropriate Scale Of China's Foreign Exchange Reserve

Foreign exchange reserves play an important role in economic development, not only improve the Macro-control capacity, but also maintain the international reputation and prevent the financial risk effectively. However, the large scale of foreign exchange reserves will aggravate the pressure of the inflation, affect the effectiveness of Macro-control and lead to trade friction, the economy growth will be restricted. Therefore, to determine the appropriate scale of foreign exchange reserves is an important guarantee for economic health,stable and sustainable development.In recent years, China's foreign exchange reserves grow rapidly and constantly. After exceeding Japan and becoming the country which has the largest foreign exchange reserves in February 2006, China became the first country who owned foreign exchange reserves over 1000 billion US dollars at the end of the year. By March 2011, the amount of China's foreign exchange reserves achieved 30466 billion US dollars. Whether the scale of foreign exchange reserves is appropriate becomes the focus of academia attention, although a lot of research has been done on the on the appropriate scale, there are different conclusions. Therefore, the purpose of the paper is to find out an accurate model and revise it according to the China's basic national conditions in order to calculate the appropriate scale of China's foreign exchange reserves.On the basis of the study on the appropriate scale of the foreign exchange reserves, the paper defines the appropriate scale of the foreign exchange reserves from the reserves demands and it's cost and benefit, determine the appropriate scale range. based on the analysis of China's demands of foreign exchange reserves, construct the reserves demand model and use the ratio method calculate the lower limit; based on the analysis of it's cost and benefit, construct the cost-benefit model according to cost-benefit method which is the upper limit. then use the models to calculate the appropriate scale range in 1994—2010. The result shows that since 1994,the scale of China's foreign exchange reserves goes through three stages: less than the appropriate scale, reasonable and more than the appropriate scale, since 2004, China's foreign exchange reserves exceed the appropriate scale and the deviation degree is more and more bigger. At last, based on the situation of excess reserves, the paper analyzes the problem of China's foreign exchange reserves management, then by learning from the foreign advanced reserve management, argues that China should strengthen the reserve management by optimizing the structure of reserves,improving the management mode,effectively using the excess reserves and strengthening the investment risk of reserves.