Research On The Factors Of The Decline Of China's Foreign Exchange Reserve

Foreign exchange reserve is the assets made up of by freelyconvertible currencies.As the most important international reserve assets for one economy,foreign exchange reserve is used to meet the requirement of international payment,adjust exchange rate and keep the balance of current account and capital account.Since the 1990 s,especially since China's entry into WTO,the foreign exchange reserve of China made substantial increase.By the end of June 2014,nation foreign exchange reserve reached its peak at 39.92 thousands millions dollar.However,nation foreign exchange reserve has made a neverhappened decrease after that summer.Until now,January 2017,China's foreign exchange reserve has flopped to only 29.98 thousands millions dollar.The shocking event leads to a hot discussion about what's wrong with our foreign exchange reserve.As one of the participants,I began my research and finished this thesis.First of all,this thesis will give a brief introduction about the concept of foreign exchange reserve and what is used for.Then I will ask what the main factors affect the amount of reserve and how they can affect the amount of foreign reserves.At the end of the first part,a mathematic model which is called co-integration and error correction model will be introduced.This academic model is based on multivariable linear regression model.Second part is the essential part of the whole thesis,which is about the empirical analysis.Helped by the co-integration and error correction model and dynamic adjustment model,I find out the relationship between foreign exchange reserve and several factors,such as exchange rate,M2 and capital outflow.The result is that whether in the long run and in the short run,these main factors both have a significant effect on the amount of foreign exchange reserve.After sorting out the relationship this thesis will summarize three reasons to explain the decline of foreign exchange reserve,and also show how it will influence the economic development.Finally,I will sum up all the ideas in the thesis and give several suggestion for the government.