Research On The Appropriate Scale Of China’s Foreign Exchange Reserves

Since the1990’s, China’foreign exchange reserve has increased rapidly, a shortage of reserve state from the year of1993gradually development for excess scale now. In February of2006, China became the country with the most foreign exchange reserves in the world, surpassing Japan. By2012, China’s foreign exchange reserve reached$331million. The growth of foreign exchange reserve caused high attention of the world. Adequate foreign exchange reserve can not only meet the needs of foreign trade and hold the RMB exchange rate stable, but also enhance the ability against external shocks, improve the international status. However, in the guarantee for the steady development of our country’s economy, high foreign exchange reserve can also bring us certain negative impact. High foreign exchange reserve can easily cause inflation. High foreign exchange reserves will increase the domestic money supply endogenous, reduce the effectiveness of monetary policy. High foreign exchange reserves will strengthen the expected appreciation of RMB. Therefore, how to determine the appropriate scale of foreign exchange reserve and optimize the management of high foreign exchange reserve has become an important problem to China’s economic development.This paper firstly studies the developing phases of Chinese foreign exchange reserve, and the characteristics of the current situation. At the same time, this paper analyses the causes of the formation of high foreign exchange reserve and introduces us the negative effects brought by economic; then using the adjusted Agarwal mode, this paper conducted the empirical analysis to China’s foreign exchange reserves of suitability. The result shows that:China’s foreign exchange reserve scale is too large. In the end, this article has put forward some policy suggestions on how to control the excessive growth of foreign exchange reserve and how to optimize the management of existing foreign exchange reserves in our country.