Research Of The Effect And Discharge Of China’s Foreign Exchange Reserves

The rapid growth of China’s foreign exchange reserves has become a hot topic for research in recent years. The main reason for the dramatic growth of foreign exchange reserves lies in the export-led economic structure, processing trade, and drastic inflow of foreign direct investment by incentive policies. Proper amount of foreign exchange reserves (FER) is of significance for the stability of macro-economy and for the prevention of financial crisis. Export and inflow of FDI has also promoted China’s economic growth to a certain degree. Nonetheless, in the context of global crisis & global economic imbalance, China’s foreign exchange reserves face a huge risk of shrinkage. With the continuous enhancement of foreign exchange reserves, its negative effects keep popping up:huge loss of domestic resources, severe pollution, and lack of innovation dynamism, trade frictions, and sustained domestic inflation. With economic development, China’s FER keeps accumulating while RMB internationalization is yet on the trial.Extant literature study in isolation the foreign exchange reserves, income distribution, trade barriers, environment protection, and regional economy. As to china’s foreign exchange reserves, extant literature focus either on how large its scale should be, on the selection of reserve currencies, currency composition or the optimization of FER structure, or on one aspect of its effects without an overall consideration. Little research is done from the perspective of FER discharge. And most domestic research has been done on the relationship between the introduction of FDI and export trade, foreign literature is focused on case study and qualitative study. Apart from this, there is no system dynamics analysis based on VENSIM simulation centering FER.Based on empirical and theoretical research, suggestions at macro-level, micro-level, and macro-micro-interactive-level are put forward, which includes:overseas investment helps discharge FER, further enhance RMB flexibility; more use of FER in importing from ASEAN countries and the other four BRICS countries, increase ODI in ASEAN countries, bring MNC’s function of discharging FER into full play, so as to effectively discharge FER, lay emphasis on environment protection; rely on innovation to promote economic growth, motivate enterprises’ self-innovation and their sustainable competitiveness through aim innovation, institutional innovation and system innovation; increase their expectations for overseas revenues, encourage cluster ODI of SME to avoid risks; etc.The innovative points of this dissertation lies in:based on desk research of relevant literatures both domestic and foreign on FER formulation, its scale and effects, and combining theories of international trade, finance, and international investment,and on the idea of a system analysis of foreign exchange reserves in the context of globalization and regional economic integration, this dissertation constructs a multi-level, comprehensive framework (FED+SD) for the examination of foreign exchange reserves:the formulation of china’s FER:formation→ scale→its effect→its discharge (FED), and a system dynamics (SD) model based on theoretical & empirical study and integrating various key relevant variables, which is composed of formulation & discharge subsystem, effect subsystem, and innovation subsystem, in the hope of extending the research areas of foreign exchange reserves. Taking CPI and income as examples, and using unit root test, Granger cause-effect test, and regression, econometrical analysis is made of FER effects(inflation, pollution, income disparity, trade friction, etc.), which shows that FER increment is Granger cause of CPI, but contributes little to residents’average disposable income. Theoretical, laboratory (innovative application of evolutionary game model with MATLAB simulation in analyzing domestic enterprises’ ODI) and empirical study (innovative application of gravity model with pool data in the study of import and ODI between China and ASEAN, China and the other four BRICS countries, and hierarchical linear model with HLM in FER study) on the background of globalization and regionalization.