A Study On The Reasonable Currency Structure Of Hina’s Foreign Exchange Reserves

With the worldwide economic developing rapidly, in the effect of continuingsurplus of the current account and capital account in the balance of internationalpayments, China has accumulated a huge amount of foreign exchange reserves. Theeconomic globalization makes our country more and more closely linked with thechanges in the world economy. The phenomenon of instability in the world economywhich has an important impact on China’s economic development appears frequently. Inthis context, the position of the foreign exchange reserves in the macro-control of thegovernment is getting more and more important so that strengthen the management offoreign exchange reserves is becoming imperative. The management of the currencystructure of foreign exchange reserves is the most important part, therefore, this thesisset the research of the currency structure of China’s foreign exchange reserves as thecore topic.In this thesis, the author choose the BLACK-LITTERMAN model which is putforward by Goldman Sachs Asset Management Company and has been extensivelystudied and applied in the field of international asset allocation as the main method. Theresearch ideas of this thesis are listed as follows: Firstly, analyzed the mathematicalstructure and building process of the BLACK-LITTERMAN model.Secondly, collectedthe financial market index data of the four economies such as United States, Japan, theUnited Kingdom and European Union and made the forecast by using the ARIMAmodel. Thirdly used the predicative result as the view of investors in theBLACK-LITTERMAN model. Finally, obtained a reasonable rate of return and thereasonable currency structure of foreign exchange reserves. There are two maininnovations in this thesis, one is the application of the BLACK-LITTERMAN model inanalyzing the structure of China’s foreign reserves, the other is the using of thepredictive value of the financial market return as the alternative variable in theBLACK-LITTERMAN model since the forecasting result by the ARIMA model canreflect the expectation of the investors more objectively, so it can come to a reasonableresult. The finding shows that the structure of China’s foreign reserves is not soreasonable, China has to modestly reduce the proportion of dollar assets, appropriatelyincrease the proportion of euro assets, stabilize the proportion of pound sterling and yenassets in order to increase the value of China’s foreign exchange reserves under thepremise of safety and liquidity rules. But the configuration process need to be in the gradually way in case of the negative influence to the economic stability.The author gives three recommendations in the last part of the thesis：Firstly, makethe good balance of the security, liquidity and profitability in the foreign exchangereserves management. A country would face different economic situation in differentperiod, so as to maintain a balance of these three requirements are also different, it isnecessary to accurately grasp the trend of economic development and timely adjust thefocus on the principals of management. Secondly, adjust the currency structure offoreign exchange reserves in a gradual manner. Reduce the proportion of dollar assetsgradually, increase the proportion of euro assets appropriately and stabilize theproportion of pound and yen assets in the foreign reserves is very important. This is notonly good for stabilizing the value of the foreign reserves, but also conducive to thedevelopment of China’s export trade, economic growth and labor employment. Thirdly,promote the process of internationalization of the RMB. This can be one of the effectiveways to solve the problem of China’s foreign exchange reserves. Theinternationalization of the RMB can not only reduce transaction costs and exchange raterisks in international trade,but also can get the seigniorage, more importantly, it cangradually change the existing currency in the foreign exchange reserves into RMB,which can effectively control the size of foreign exchange reserves and optimize thecurrency structure. Therefore, in the context of China’s stable economic developmentand rising international status, promote the internationalization of RMB actively, breakthe the state of being over-reliance on the U.S. dollar and the euro, is an effective way toimprove China’s foreign exchange reserve management.All in all, the adjustment of the currency structure of foreign exchange reserves, isthe decision made by the government considering the economy and politicalbackground and the financial market development of the currency issuing economies,combine with the trade-off in the three priciples of safety, liquidity and profitability.These factors are not static, thus the configuration of the foreign exchange reservescurrency is a dynamic process. China must stick to develop the economy and improvethe comprehensive national strength, as well as pay attention to the changes in theinternational economic situation and improve the ability of foreign exchange reservesmanagement, so as to achieve the target of the improvement and optimization of thecurrency structure of foreign exchange reserves.