Theory And Empirical Analysis On The Demand Of China’s Foreign Exchange Reserves

Since the end of the1970s our country implements the reform and opening-up policy, Chinese economic obtain rapid development and at the same time the foreign exchange reserves have also made substantial increase. By the end of2012, nation foreign exchange reserves are nearly$331million. So in regard to China’s huge foreign exchange reserves, consider the main factors that affect the demand of foreign exchange reserves, appropriate scale, the relationship between long-term and short-term, improve management model have important theoretical and practical significance.First, the topic will help us consider the main factors which affect the demand of reserves. In similar economic policies and foreign trade dependence, unlike Hong Kong and Korea do not have enough reserves to resist the Asian financial crisis, China’s reserves is too huge. Then we will ask what the main factors affect the demand of reserves.Second, the topic will help us measure the appropriate scale of reserves. As the saying goes "too far" means that do everything must have a degree. Therefore, measure the appropriate scale of reserves has important theoretical and practical significance.Third, sorting out the relationship between long-term and short-term will help us grasp the future trend of China’s reserves. In the long run, the high-speed growth of China’s reserves is not sustainable; it will stable or declined slightly in the short-term fluctuations.Last, the improvement of management model also has important theoretical and practical significance. Current the rapid growth of China’s reserves and assets shrink coexist, means that the more reserves our country held, the more losses we will suffered. Thus how to improve management model is also the research significance of this article. It is true that to our country the reserve matter is very important. In order to solve the above problem, I begin the creation of this article. First, I divide variety of the reserves into four stages. Second, based on the theory of Maslow’s hierarchy of needs, I divide impact factors of China’s reserves need into four levels which from low to high. Last, I establish the dynamic adjustment model and error correction model and conduct empirical analysis on variable data between1985and2011.There are three points of this article. First, the long-term demand of China’s reserves is mainly affected by imports, the nominal exchange rate of the RMB against the U.S. dollar, the opportunity cost of holding reserves. Second, there exists gap between our wishes of reserve holdings and the actual holdings. Last, the part which the actual reserve holdings of the last period deviates from the equilibrium level also has influence on the short-term fluctuations of reserves.Summary, there are several innovations of this article. First, use the dynamic analysis methods to analysis the question of reserves demand. Second, based on the theory of Maslow’s hierarchy of needs, I divide impact factors of China’s reserves demand into four levels which from low to high and select imports, the balance of foreign direct investment, the balance of foreign debts, the nominal exchange rate of the RMB against the U.S. dollar, the international balance of payments volatility, the opportunity cost of holding reserves, GDP. Third, use co-integration theory and impulse response function to collaborative analysis the question of reserves demand. Last, based on dynamic adjustment model, I build error correction model is also a innovation of this article.