Study On The Moderate Scale Of China’s Foreign Exchange Reserves

Foreign exchange reserve is an important indicator to measure a country’seconomic and financial strength.It plays an important role in regulating the balance ofinternational payments，stabling the exchange rate，increasing international financingability and enhancing international competitiveness.In recent years, the globalfinancial crisis, world economic turmoil,the rapid development of internationalfinancial innovation and world economic integration make the scale of foreignexchange reserve becoming a hot topic again.Too few foreign exchange reserves isdifficult to meet the demand of foreign exchange in Chinese foreign communication,excessive foreign exchange reserves will face the risks of holding costs in today’scomplex international financial environment.This article is based on this background,to explore the appropriate scale of China’s foreign exchange reserves.In addition to the first part of the introduction, this thesis consists of three parts.The second part analyzes the reason and influence of the development of China’shuge foreign exchange reserves and the rapid growth of foreign exchange reserves.The author introduces the development process of China’s foreign exchange reservessince the new China was founded,analyzed the reason why our country finally tobecome the world’s largest foreign exchange reserves in the world along with China’sforeign exchange reserves from the short enough,as well as the background of thattime.China’s favorable economic development situation and the foreign exchangemanagement system is the internal factors of China’s foreign exchange reserves highgrowth;Global excess liquidity and the imbalance in global economic development isthe external factors to promote China’s foreign exchange reserve growth.Through theanalysis of cost and income in the process of China’s huge foreign exchange reserves,cost including quasi financial cost, opportunity cost,economic distortions cost, cost ofeconomic welfare and financial stability cost;income is mainly reflected in guarantee the security of rising scale of external debt repayment and maintaining China’sfinancial security and stability.Under the impetus of the high cost, our country need tostudy the moderate scale of foreign exchange reserves, and find a way out for excessforeign exchange reserves.This part is the foundation of the later analysis.The third part is the empirical research of China’s moderate scale of foreignexchange reserves. The author carried out the empirical analysis from two aspects,themoderate scale of foreign exchange reserves and the dynamic adjustment of thereserves.On the one hand,this paper introduced Agawal model which is suitable forthe measure of foreign exchange reserve in developing countries,and corrected themodel according to China’s specific conditions.Then use the adjusted Agarwal modelmeasures the moderate scale of China’s foreign exchange reserves from1982to2012.The empirical results of the adjusted Agrawal model shows, China’s foreign exchangereserves has been in a state of shortage since1978, until2005, China’s foreignexchange reserves began to exceed the actual demand. On the other hand this paperuses the Adaptive expectation-partial adjustment model to analyze the dynamicadjustment process of foreign exchange reserves.The results of the Adaptiveexpectation-partial adjustment model shows，the total import and export volume isrelated to the reality of our country foreign exchange reserve，and so is the foreigndirect investment in China，While the total amount of foreign debt is negativelyrelated to the reality of our country foreign exchange reserve.The last part is the conclusion and suggestions.The conclusion is that China’sforeign exchange reserves have began to exceed the actual demand from2005.Inorder to realize the diversification of foreign exchange reserve assets and investmentdiversification,this paper puts forward some constructive suggestions on China’sexcess foreign exchange reserves, including the establishment of the foreign exchangestabilization fund, creating an international board stock market, increasing the goldreserve and strategic materials, as well as the development of sovereign wealth funds.The innovation of this paper lies in the following three aspects.Firstly, combinedwith the actual situation in our country, this paper applies the time series data ofnearly30years in our country to measure, to ensure the accuracy of China’s foreign exchange reserves calculation results.Secondly, this paper modifies the Agrawalmodel, and uses the revised Agrawal model to measure the scale of China’s foreignexchange reserves.Thirdly,this paper uses the Adaptive expectation-partial adjustmentmodel to analyze the dynamic adjustment process of foreign exchange reserves.The deficiency of this paper lies in the following two aspects. Firstly, this paperanalysis mainly from the foreign scale theory, may have less comprehensiveconsiderations on China’s specific national conditions. Secondly, in this paper, theanalysis of empirical results over reliance on data model, resulting in slightly rigid.