The Study Of Moderate Scale Of China’s Foreign Exchange Reserves And Optimal Management

Foreign exchange reserves as an important symbol reference variable of economic and financial strength, which reflect the ability to adjust country’s balance of payments and stabilize the foreign exchange market. The study of foreign exchange reserves has always been the hot question for people to concern and an important issue at home and aboard. Since1994, over China adopted the reform of the foreign exchange reserves system, china’s foreign exchange reserves has always maintained sustained and rapid growth trend. By the end of June2012, China’s foreign exchange reserves reach up to3240.005billion dollars.In today’s situation of the economic globalization and financial internationalization, China has such a huge foreign exchange reserves that aroused scholars’extensive controversy from home and aboard. On the one hand, sufficient foreign exchange reserves protect the national currency exchange rate stability, enhance the ability to adjust balance of payments and safeguard the security of the country’s financial system, which make economic go smoothly development forward. On the other hand, the high opportunity cost of holding the huge foreign exchange reserves, which can lead to excess liquidity, structural inflation, the invalidity of independent monetary policy and a huge threat of U.S. dollar devaluation etc. These will have brought a negative impact to China’s economic development. At present, China’s foreign exchange reserves on the growth rate and holding, have reached a t very high level of history, which raise heated debate in the academic community about moderate scale of China’s foreign exchange reserves, but no consensus was reached. Therefore, to determine the appropriate scale of China’s foreign exchange reserves adapted to the level of China’s economic development and optimizing China’s foreign exchange reserves management mode has become the government and scholars expect to resolve the issue, but also the key to protect the healthy development of China’s national economy. This article mainly through unstructured analysis methods and modified Agarwal model from two different angles determine moderate scale of china’s foreign exchange reserves and thus relevant conclusions are reached. Then to select representative country’s foreign exchange reserves management model for international comparison, by drawing on the experience of these countries foreign exchange reserves management model, we make suggestions to optimize the management of China foreign exchange reserves.The basic structure framework in the paper consists of the following five components:The first part is the introduction. This section first describes the background and significance of the study, followed by introduction of the definition related to foreign exchange reserves, making us have the accurate understanding as a whole. Then review the relevant research results of literatures of foreign exchange reserves at home and aboard. With systematic reviewing and combing related literatures at home and aboard, which pave the way for theoretical model and empirical analysis.The second part expounds about the theoretical model of the foreign exchange reserves. This section reviews the appropriate calculation of foreign exchange reserves that was created by foreign scholars, and makes a very systematic induction. The detail comprises the ratio analysis method, cost and benefit analysis method, the regression analysis method, the buffer stock model, the money demand model and unstructured analysis method etc. This part has laid a very solid theoretical foundation for the establishment of the following moderate scale of foreign exchange reserves model.The third part is the present situation of china’s foreign exchange reserves. This part first describe the exchange trend of the foreign exchange reserves, then analysis the objective necessity of China’s foreign exchange reserves surge fact. In the end, we make an analysis about the impact of China’s huge foreign exchange reserves. The fourth part is the empirical research to the appropriate scale of China’s foreign exchange reserves with the unstructured analysis method and modified Agarwal model from two different angles. The unstructured method based co-integration theoretical, establish the appropriate scale measurement model of foreign exchange reserves. This part first selects three decisive variables of annual imports, foreign debt, the actually utilization of foreign investment which has the most significant impact on foreign exchange reserves. Then these variables are associated with foreign exchange reserves, to build the long-term co-integration equation of dynamic equilibrium model, and then estimate the moderate scale of foreign exchange reserves measure and come to a conclusion. The modified Agarwal model put traditional Agarwal model as a theoretical support, source of demand of for reign exchange reserves besides the traditional trading and regulatory requirements, and divided into intervention requirement, debt service requirement, FDI profit requirement, precautionary requirement, folk requirement, and supplementary requirement. Through calculating these demand scales of foreign exchange reserves, and amend the traditional model, then using the modified model estimate the moderate scale of China’s foreign exchange reserves and come to a conclusion. In the end, comprehensive the results of two different methods make a comparative analysis.The fifth part is proposal to optimize the management of China’s foreign exchange reserves. This section first makes the detailed comparison of foreign exchange reserve management model in Japan, Korea, Singapore. Then combined with the actual situation of China’s foreign exchange reserves and learn from these countries’foreign exchange reserves management, and propose some specific recommendations to optimize the management of China’s foreign exchange reserves.