Dynamic Foreign Reserve Allocation Management Based On Globalization View Of Finance

For 40 years since 1978,China has made glorious success in economy.In 2017 China has been achieved 82.tr.dollars in GDP,making it second place in the world.Meanwhile China also mas made huge amount of foreign exchange reserve since 1978.Before 1978,china’s total foreign exchange reserve is no more than 10 billion US dollar,however,in 2017,china has already accumulate 3.16tr.foreign exchange reserve.Today China’s total foreign exchange reserve accounts for one third of world’s total foreign exchange reserve in market value.However we have to acknowledge that China still has some big problems in foreign exchange reserve management.For instance,China’s main foreign exchange reserve is valued in US dollar,which makes it in foreign exchange rate risk.For another example,China’s main reserve asset are treasury bonds issued by department of treasury of United States.As we may know;those bonds have very low yields.Recent years,China has make a very successful plan,which is named the "one belt and one road" strategy.In this plan,China will make the open and reform policies in a new stage and broader stage.So we have to improve the foreign reserve management.In this essay,we mainly concentrate on foreign reserve management.In the first half of this paper,we mainly talk about how China has made such a huge amount of foreign exchange reserve.We focus on the history of past 40 years in which China has made such a successful economy miracle.We conclude that there are three main reasons:first,China has a very long history of international trade which results in reserve accumulation;second,due to the compulsive policy of selling and buying foreign reserve by appointed banks,China has made it rich in foreign reserve assets;last but not least,foreign direct investment and international hot money are both key access to the reason.Then we mainly focus on china’s reserve structure.We find that china’s main reserve currency is US dollar which accounts for at least 60%of total reserve.Under this circumstance,there will be three main problems.First,china’s reserve would be in interest risk due to the variance of US dollar.Second,china’s reserve yields too low in such US treasury bonds.Third,china’s reserve structure is far different from its structure of international trade,which is not a suitable situationIn the second half of this paper,based on Markowitz’s modern investment theory,we introduce a foreign exchange reserve allocation model.We also introduce the conception of US dollar index and other seven currency indices.Then after bringing into two major time variable,we transfer the allocation model to a dynamic allocation model.Within the dynamic foreign exchange reserve model,we can figure out the optimal time variables which made the reserve portfolio the best yield and least risk.In the final part of this paper,we discuss the probability of predicting US dollar index.We find out the US dollar index can be predicted by probability which can be applied in the further allocation model of foreign exchange reserveThis papers conclude that there exists a dynamic foreign exchange reserve method based on modern investment portfolio theory.Furthermore we find the currency indices can be predicted by probability and we may introduce this method to more complicated reserve allocation model.We hope our conclusion and solution can be applied in China’s foreign reserve management...