Research On Stratified Measurement And Management Of China's Foreign Exchange Reserve Demand

Since the reform of the foreign exchange management system in 1994, China's foreign exchange reserves have maintained a steady increase. The scale of our foreign exchange reserves surpassed Japan in 2009 and then exceeded four trillion dollars in 2014. It makes China the largest holder of foreign exchange reserves in the world. Huge reserves have brought convenience, but they also resulted in a number of problems such as increasing risk of depreciation and huge cost of management. To meet the external solvency and preventive demands as a precondition, how to improve the effective management of China's foreign exchange reserves and perform the function of the reserves as the wealth of nations, therefore, has become an urgent problem.As one of the active management modes of foreign exchange reserve, multi-level management points out the direction for the reform of our reserve management. Multi-level management includes three parts: the first part is dividing the whole foreign exchange reserves into several levels according to demands; the second part is configuring appropriate management authority for each level; the third part is making reasonable operation strategies for each level. Following the idea, the paper firstly divides the demands on foreign exchange reserves into transactional demands,precautionary demands and earning demands corresponding to Keynesian's theory about individual motivations of money demands. Secondly, this paper uses ratio analysis, JR model and Logit model to calculate the scale of foreign exchange reserves for each demand and point out the defects of China's reserve management by comparing the calculation with the current reserve asset allocations. Thirdly, to provide theoretical and practical reference for multi-level management of China's foreign exchange reserves, this paper exemplifies and summarizes international experience based on reserve demands. Finally, using above analysis as a foundation and combining the opportunities and risks we are facing, this paper give specific suggestions on management institutions and operation strategies for China's multi-level management of foreign exchange reserves .The results indicate that: (1) during 2009 to 2015, the basic demand of China's foreign exchange reserves account for 40% of the whole reserves on average. The part which beyond the basic demand can satisfy the demand of profitability, and it accounts for 60% of the whole reserves on average; (2) the foreign exchange reserves which satisfy basic demands should follow the principles of security and liquidity. The reserves which satisfy earning demands should follow the principle of profitability. But for our current reserve asset allocations, reserve assets with higher liquidity account for 55% while those with higher profitability just account for 45%. This means our reserve asset allocations do not match the reserve demands; (3) to solve the problems of reserve management, our country should learn from international experience and reform the current management. It is the ultimate goal for our country to build a multi-level management system with Chinese characters and make the massive foreign exchange reserves be managed more effective.