An Empirical Analysis Of Impact Of RMB Exchange Rate Expectation On China’s Foreign Exchange Reserves

Starting from the evolution path of RMB exchange regime, two methods was usedto examine the impact of expectation of RMB exchange rate on China’s foreignexchange reserves. After drawing on experiences of previous studies, the evolutionprocess of RMB exchange rate regime was divided into four phases. Besides,considering the main factors affecting China’s foreign exchange reserves, and thenselected the data of some macroeconomic indicators from144continues months,namely from January2000to December2011. These macroeconomic indicators wereGDP, the RMB exchange rate, net exports, consumer price index, foreign directinvestment, the balance of foreign debts, the nominal interest rate, non-deliverableforward foreign exchange transactions, and the balance of international payments.The first method was based on the Rational Expectation Theory. At the beginning,the factors impacting RMB exchange rate in different periods were examined, and thenthe sequence of rational expectations of RMB exchange rate was generated, after whichcombined the sequence with other major macroeconomic indicators as a whole toexamine their effects on the foreign exchange reserves in different periods. In thesecond method, the indicator of NDF was directly used and the next step was the sameas method one. Both of the results based on the two different methods mentioned aboveindicated that the change of expectation of RMB exchange rate positively correlated toforeign exchange reserves, which was to say, the appreciation of RMB would makeforeign exchange reserves increase. Especially, the result from the second methodsignificantly demonstrated the quantified effect especial in the fourth period from June2008to December2011.The result also revealed that the effect of various stages on foreign exchangereserves had characteristics of structural changing. At last, decreasing the expectation ofRMB exchange rate and the amount of foreign debt balance was a practicable method tokeep foreign exchange reserves at a moderate scale...