A Study On The Optimum Scale Of China’s Foreign Exchange Reserve

As the accumulation of external assets, foreign exchange reserve plays an important role in meeting the demands of import and export, maintaining the exchange rate and coping with sudden events by a country. Since the implementation of the open-up and reform policy, China has accumulated large amounts of foreign exchange. Statistics from People’s Bank of China shows that in2012, there are about USD3300billion foreign exchange reserve in China, taking up one third of the total amounts across the world.Although foreign exchange reserve plays an important role in making up the deficiency in international trade, maintaining the stability of interest rate and paying the foreign debt, that does not mean the more foreign exchange reserve the better. Firstly, large foreign exchange reserve means the net outflow of treasures. For a developing country like China, it is a kind of waste. Secondly, due to the special system of settlement and sale, the large foreign exchange reserve forces the central bank to release large amount of base money into the market, which makes the cost of the implementing of policy higher and also brings the transmitted inflation. Thirdly, the large amount of foreign exchange reserve also causes the dissatisfaction from trade partners, pushing Renminbi into domestic deflation and outward inflation dilemma.Thus the large foreign exchange reserve bring us worry rather than ecstasy. From government officials, scholars to ordinary people in china, attitudes are changed from the fever of "making money through exporting" to the reasonable reflection about the issue. Especially the finance crisis in2007in America intensifies the worries by the people all around China.On the one hand, foreign exchange reserve plays an important role in the stability of the economic development and on the other hand, the large amount of foreign exchange reserve will do harm to the long term development. Therefore, the research about foreign exchange reserve will be an important topic. On the basis of previous studies from home and abroad, the present research will conduct an empirical study of China’s foreign exchange reserve scale expecting to have a clear picture about the status quo and better management of foreignexchange reserve. The whole thesis will be divided into six parts.The first chapter is the introduction. The research background, research meaning, rationale, layout of the thesis as well as the innovation and limitations of the present research will be introduced. Meanwhile, a literature review of domestic and abroad research on this topic will be conducted.Chapter two will be the analysis of the status quo of foreign exchange reserve in China. Firstly, the definition, function of foreign exchange reserve and factors which will influence of foreign exchange reserve will be introduced. Then, a horizontal and vertical comparison of foreign exchange reserve will be conducted on the basis of a systemically review of the history of foreign exchange reserve in china.Chapter three introduces the theoretical bases for the measurement of the scale of foreign exchange reserve. In this part, ratio analysis, money demand analysis, agarwal model, multiple linear regression model and qualitative methods will be explained to assess the strength and weakness of each method.Chapter four is the empirical study of the scale of foreign exchange reserve in China. On the basis of the analysis of Chapter three, in this chapter, the agarwal model and multiple linear regression model will be adopted for the empirical study of foreign exchange reserve moderation.Chapter five is the analysis of the cost of large foreign exchange reserve in China. Attention will not be paid to the whole cost. The focus will be on the cost from entity investment and private department short term debit perspectives.Chapter six is the policy suggestions. Based on the previous analysis, this chapter will present suggestions from open-sourcing and cost reduction perspective.The research result is when using analytical method to contrastively analyze the index of correlation, the author selects proportional relation between the amount of imports and foreign exchange reserve, short term external debt and foreign exchange reserve, the proportion that the foreign exchange reserve takes up in broad money M2and the proportion that the foreign exchange reserve takes up in GDP, etc. The result shows that the index of correlation is far beyond rational scale no matter in a lengthways or horizontal comparison. While the empirical result based on Alcatel Wall and multiple linear regression model shows a problem of too much foreign exchange reserve. Thereinto the empirical model shows that in2011the size of foreign exchange reserves is$1182.488billion, and the part in excess is as much as$2017.916billion. While the multiple linear regression model based on panel shows that in2011the appropriate size of foreign exchange reserve of our nation is$1623.726billion and the part in excess is as much as$1579.063billion. When analyzing the holding cost of the foreign exchange reserve, the author does not analyze it in a general way, but analyze it respectively from the perspective of real investment, especially from the view of private sector. From the perspective of real investment, the holding cost of the excess foreign exchange reserve is281.5billion in2011, taking up3.85%in GDP, far beyond the proportion of fiscal education cost and science research. When analyzing from the perspective of private debit and credit, the holding cost is60billion in2011, taking up0.83%in GDP. This exceeds the total amount of GDP of Tibet, Qinghai, Ningxia and Hainan Province.Innovations of this paper are as follows:①Updating the time interval of study and time span is large②By taking the development of studies in foreign reserve research into consideration, the present thesis adopts a modified structure of agarwal model, multiple linear regression model.③When using the mature ratio model, the author does not only analyze the domestic situation, but also conduct a contrastive study of China and the BRICK countries. ④Not just focus on the domestic situation, the multiple linear regression model is used on the basis of data from more than30developing countries.⑤Do not focus on the general cost but analyze the cost from the entity investment and private department perspectives. The conclusion part presents some policy suggestions on the reform of foreign exchange reserve from the perspectives of optimization of money, the change of current sales system, open sourcing and cost reduction.