A Study On The Structure Optimization Of China’s Foreign Exchange Reserves

After the U.S. sub-prime crisis and European debt crisis, China’s huge foreignexchange reserves face greater risk of depreciation in foreign exchange reserves. Under thesituation of increasing reserves, how to manage structure effectively is the key to reducethe risk and solve the problem. This paper analyzes the current situation and problemsregarding of the management of foreign exchange reserves structure, and find that thecurrency structure or asset structure are very dependent on both the dollar and dollar assets.In the empirical analysis, this paper combines Modern Portfolio Theory, Heller-Knightmodel and Dooley model with AHP model, and obtained the optimal ratio of currencystructure, and analyze the possibility to optimize asset by increasing gold and adjustingdollars asset.The study of this paper indicates that the structure of foreign exchange reservescurrency and asset structure needs to be improved, China should gradually reduce theproportion of dollars in foreign exchange reserves, and appropriately increase theproportion of the euro and the yen; On the basis of guarantee the safety and liquidity, toobtain the profitability and asset diversification; gold as a safe asset which can play a betterrole in the event of a crisis hedge, and thus play a role in stabilizing the economy.In the last, we propose some policy recommendations: in the optimization of currencystructure, through the development of free trade zones, expanding cross-border RMB tradesettlement and promoting RMB internationalization are three good ways to reduce theproportion of dollars; in the optimization of asset structure, holding more gold couldincrease the yields of reserve assets. In recognize of the structure of management offoreign exchange reserves is a huge project, which need to be optimized step by step.China’s foreign exchange managers should attach importance to the structure of themanagement of foreign exchange reserves, maintaining and increasing the value of foreignexchange reserve assets.