Monetary Structural Optimization Of China Foreign Exchange Reserve Based On The Expectation Utility-Entropy Model

By December,2014, China’s total foreign exchange reserve has reached$3.84trillion. High-speed growth of foreign exchange reserves is a "double-edged sword". It not only enhances the comprehensive national power of a country, but also brings many problems on macro-control, independence of monetary policy and exchange-rate risk. Under this background, discussing the optimization of the structure of our foreign exchange reserves has become a popular issue which has great theory value as well as practical significance. This article will discuss this problem from the angle of structural optimization, expected utility-entropy model will be used for the study and aims at getting meaningful policy suggestions.Firstly, this paper compares present monetary structure of our country with global situation and reveals the defects of China’s current foreign exchange reserve currency structure, such as excess dollar reserves, single asset allocation, lower proportion of gold reserves and monetary structure does not match to exchange rate regime. Secondly, this article analyzes factors that affect the choice of currency. Thirdly, on the basis of research results at home and abroad, this paper applies expected utility-entropy model and at the same time considers international trade situation, foreign debt situation, exchange rate, economic strength and other factors to determine the foreign currency. Then this paper uses Matlab to calculate the optimal proportion and find that holding currencies of emerging markets can effectively reduce the risk and increase return. In addition, this paper expands the scope of reserves and takes gold into consideration under the international reserves. Finally, this paper makes summary of the text and puts forward a few policy recommendations on China’s reserves management combined with the current economic situation.