Research On Valuation Effects Of China’s Foreign Exchange

The scale of Chinese foreign exchange reserves ranking first in the world fullyshows that Chinese economic strength and international status, but such huge andgrowing foreign exchange reserves, have also brought many problems and disputes toChina. One of the problems that these people care generally is such huge foreignexchange reserves how to achieve true wealth inflation-proofing and appreciation. Onefeasible way is by estimating and comparing the value of foreign exchange reserves andthe yields before and after the implementation of diversified management to judge themerits of diversified management. But there is a study on the problem of valuationeffects. Valuation effects is the corresponding changes of the value of one country’s netforeign investment position caused by the changes of exchange rate and asset prices andother factors. Accompanied by the trend of global economic integration, this effect playsa more and more important role in the value of net foreign investment position. As themost potential developing country, China is no exception,"double surplus" exists morethan10years and accumulates the massive, foreign currency-denominated assets, theassets hold in dollar, euro, etc. In combination with the relevant data, we can find thatRMB real exchange rate has a significant sign of appreciation in China, since thereformation of the exchange rate system in2005. Inevitably it leads to the loss offoreign assets holding in RMB, and this is the problem that we want to study mainly inthis paper-valuation effects.On the basis of previous studies, this paper introduces basic concepts andcategories subdivisions, theoretical derivation and influencing factors of valuationeffects, mainly introduces three methods of calculating the valuation effects andcompares three methods (including the indirect method, direct calculation method andanalytic method). And we find that analytical method is more applicable to calculate thevaluation effects, and we use the data and methods to estimate the valuation effects onthe basis of the changes of exchange rates, the conclusion shows that, due to thefluctuations in international exchange rates have been significant in recent years(especially the U.S. dollar), whether it is the changes of exchange rates of a commoncurrency converted into general currency, or the exchange rate changes of domesticcurrency into foreign currency have appeared a trend of significant fluctuations. And theinfluence of the valuation effects is also in the corresponding expansion. But taking intoaccount the multi-year valuation effects cancel each other, it makes valuation effects in the long time to be much less than the short-term. So if we want to study the realsituation of the valuation effects, can not only consider the valuation effects of eachpoint in time, but to make a comprehensive, integrated data analysis and research. Sonext on the basis of IMF’s research achievements in2005, we do empirical analysisabout the real situation of valuation effects in the change of net foreign assets by usingcointegration equation and error correction model, through this part of the empiricalresearch we can conclude that our country exists some negative valuation effects. Theconclusion shows the management level of Chinese foreign asset is low, and the netforeign assets is in the shrinking state. The positive effect of the external current accountsurplus is cancelled out by the negative valuation effects directly. Although thesterilization effect to improve the present situation of our external disequilibrium hascertain help, but in virtually it makes domestic resource to be transferred abroad for free.So as a developing country, at present our country to achieve external economicequilibrium, should reduce the current account surplus and even to the deficit, changethe current situation of continuing to output resources, and ultimately achieve the targetof utilizing foreign resources to promote the economic development of our country. Atthe same time, the relevant government departments need to improve the managementlevel of net foreign assets (especially the foreign exchange reserves), make the valuationeffects change from negative to positive, and increase the value of net foreign assets.Finally, combining with the theoretical analysis and empirical research, this article putsforward some corresponding policy recommendations for the domestic relevantgovernment departments. We hope the relevant departments and agencies in attachesgreat importance to the accumulation of foreign assets, can improve their assetsmanagement capabilities, and make the valuation effects on our country’s negativeinfluence be to a minimum.