Research On The Relationship Between The Rapid Growth Of China’s Foreign Exchange Reserves And Inflation

In the past30years, China’s foreign exchange reserves had experienced twohigh-speed growth periods. The first time was in the mid-1990s (mainly from1994toAsian financial crisis), China began to put foreign exchange system reform into trial useduring this period, achieving the unification of the exchange rate between officialexchange rate and the market exchange rate, establishing a single managed floatingexchange rate system. At the same time, our country established a unified foreignexchange market. The second time was in the early2000s, that is, after accession toWTO, China entered into the years of rapid growth, from$212.165billion in2001to$3.3116trillion in2012, an average annual growth rate had reached41.90%, during thisperiod, China’s foreign exchange reserves reached$1,066,344,000,000in2006, jumpedover Japan to become a country with the world’s largest foreign exchange reserves. Andat the same time, China’s consumer price index (CPI) continued to grow year on yearfrom2003to2012, prices continued to push up and inflation pressure increased.Under the condition of an open economy, although dollar-denominated foreignexchange reserves can ensure a relatively safe and stable exchange rate system,enhancing national comprehensive strength and external ability to pay, huge foreignexchange reserves, at the same time, has brought many difficulties to internal regulationof the economy. In order to maintain a relatively stable exchange rate, the central bankhad recurring passively entered into the foreign exchange market to buy foreignexchange, which will inevitably lead to a fact that base money in financial marketsincreased rapidly, causing prices to rise, bringing a lot of resistance to economic growth.Based on the above elaboration, of course, expanding the scale of foreign exchangereserves and rising inflationary pressures is bound to become a relatively prominentissue in our country’s economic activities. Under the background of the interactionbetween existing reserves and central bank monetary policy management system, howto study and interpret the correlation between growth of foreign exchange reserves andprice levels as well as the extent of its impact has a very important theoretical andpractical significance.This dissertation is based on the above issues, first of all, the dissertation studiesthe theoretical relationship between foreign exchange reserves and inflation theory.Meanwhile, under the background of the periods of rapid growth of foreign exchange reserves, the paper describes the change in foreign exchange reserves during this period,represents an increase of foreign funds, the changes and fluctuations in the price of M2,and uses the annual data segment space for sample selection according to China’s actualuse of statistical data and other measurement tools co-integration theory, establishingmeasurement model of foreign exchange reserves and price fluctuation, investigatingthe relationship between the foreign exchange reserves and the impact of pricefluctuations from the empirical angle, and finally, for the empirical analysis of theresults and analysis of the status, the paper summarize and conclude the policyrecommendations to deal with the growth of foreign exchange reserves and inflationpressures.