Research On China’s Foreign Exchange Reserves Management Under Multi-object View

For a long time,the management of China’s foreign exchange reserves are highly concerned issue of the State Administration of Foreign Exchange,the People’s Bank of China and the financial market regulatory authorities.Especially after the Fifth Plenary Session of the 19 th CPC Central Committee in October 2020 proposed to "accelerate the construction of a new development pattern with the domestic cycle as the main task and the domestic and international double cycles mutually promoting",Foreign exchange reserves,as an important support and starting point for safeguarding and realizing the new economic pattern of "double cycle",are playing an increasingly important role.To ensure the safety and profitability of assets is the goal of foreign exchange reserves management.The basic idea of foreign exchange reserve asset management is to steadily maintain and increase the value of foreign exchange reserves on the premise of ensuring the safety of assets.However,different from the general portfolio management issues,China’s foreign exchange reserves management has its own particularity: First,China’s foreign exchange reserves bears multiple economic objectives.A review of the past 30 years of foreign exchange reserve asset management experience and academic research conclusions shows that China’s foreign exchange reserve bears multiple economic objectives such as maintaining currency stability,preventing international financial risks,and so on.The decision-making dimension of asset size and structure selection is relatively complex.Second,China is in the process of accelerating financial opening-up,and the scale of foreign exchange reserves will continue to increase.Data in the past10 years show that the expansion of capital account has gradually become the dominant factor affecting the change of the scale of foreign exchange reserves.With the further deepening of China’s financial opening-up in the future,to deal with the scale,structure and risks of foreign exchange reserves is a new problem for China’s foreign exchange reserves management.Third,the external political and economic environment has become more uncertain,international financial risks have intensified,and combined with the impact of the "COVID-19" epidemic,the future changes in the world economic cycle and the recovery process are not clear.Therefore,foreign exchange reserves need to actively respond to domestic economic growth and prevent shocks such as international financial risks on the basis of "maintaining and increasing value".The decision of foreign exchange reserves assets management is to determine the reasonable scale of foreign exchange reserves,and to allocate the proportion of foreign exchange reserves assets reasonably.The decision of foreign exchange reserves assets management is to take into account the multiple goals of "maintaining and increasing the value" of foreign exchange reserves,promoting economic growth and maintaining the stability of currency value.Based on this,this paper studies the goal is to put forward "target" perspective of foreign exchange reserves management ideas and models,explore the target set of Chinese foreign exchange reserve management is facing,multi-objective perspective empirical estimates China’s foreign exchange reserve ratio of rational scale and structure,hope eventually put forward some useful suggestions to the practice of Chinese foreign exchange reserves management.Specifically,the main research work and conclusions of this paper include:(1)This paper summarizes the causes of changes in the scale of China’s foreign exchange reserves and analyzes the necessity of managing foreign exchange reserves assets from the perspective of "multi-objective".According to the data and relevant research on the scale change of foreign exchange reserves in the past 30 years,we find that: First,economic development is the decisive factor for the long-term change trend of foreign exchange reserves.Second,RMB,US dollar exchange rate and monetary policy of China and the United States are the key factors affecting the short-term change of foreign exchange reserves.Third,the "active" adjustment of the foreign exchange reserve administration in recent years optimizing the scale of foreign exchange reserves should be an important factor affecting the scale of foreign exchange reserves.Based on this,the necessity of "multi-objective" perspective for foreign exchange reserves management lies in the following: Firstly,the multi-objective perspective study of foreign exchange reserves asset management decision-making conforms to the specific practice of China’s foreign exchange reserves management in the past;Secondly,facing the future,changes in the international political and economic environment and China’s own economic development strategy require foreign exchange reserves to play a more important role.Therefore,it is also necessary to discuss the choice of the scale and structure of foreign exchange reserves from the perspective of "multi-objective".Finally,it is helpful to study and judge the scale of China’s foreign exchange reserves more objectively.(2)The paper constructs a multi-objective management model of foreign exchange reserves.This chapter proposes that foreign exchange reserve assets should be considered in order of transaction demand,precautionary demand,financial risk prevention demand,speculative demand,and based on the multi-objective programming model to study the optimal size and structure of China’s foreign exchange reserves under three different situations.The results show that,in terms of the scale,China’s foreign exchange reserves do have the problem of "scale over allocation".The total amount of over allocation is about 1.3 to 2 trillion US dollars,which is mainly caused by the "passive" growth caused by the transaction demand from 2006 to 2011,and the change of foreign exchange reserve model is reasonable since 2011.In terms of the structure,China’s foreign exchange reserves should be dominated by bonds and US dollar assets,and the ratio of bonds and US dollar assets should be maintained at about60% - 70%.However,the actual changes of China’s foreign exchange reserves and US dollar prices are higher than the calculation results in this paper,which indicates that China’s foreign exchange authorities may have overestimated the impact of the decision-making of price changes in foreign exchange reserves for a long time.(3)This paper investigates the role of foreign exchange reserve investment to hedge overall macroeconomic risks.Different from usual micro profit-maximizing purpose,the investment with macro objective is unique in the field of foreign reserve investment.We propose a framework of mean-variance-CVa R(conditional value at risk)model to capture the features of such investment and calculate the optimal allocation of foreign reserves in China.We use Cornish-Fisher method to calculate CVa R and adopt Quasi-Newton algorithm to solve the optimization problem.Two scenarios are compared in the paper: the usual micro profit-maximizing portfolio and the sovereign portfolio hedging macro risks.We find that hedging the overall macro risks and lower the overall volatility of the economy through foreign reserve investment is possible under certain risk constraints.(4)This paper puts forward the strategic resource security goal,and introduces it into our multi-objective foreign exchange reserves management model.Based on the import dependence index,copper,soybean and crude oil are selected as the alternative assets of foreign exchange reserves,and the feasibility of introducing foreign exchange reserves into bulk commodities is discussed.The findings are as follows: Firstly,the introduction of bulk commodities into foreign exchange reserves can significantly improve the allocation efficiency of foreign exchange reserves.Foreign exchange reserves should still be mainly held in US dollar assets,accounting for about 50% -65%,while bulk commodities account for about 4% - 5%;Secondly,the introduction of foreign exchange reserves into commodities will have a "crowding out" effect on other assets.First,commodities will squeeze out gold.After gradually increasing the proportion limit of commodities,commodities will squeeze out foreign currencies such as euro,yen and pound;Finally,the simulation results show that the future foreign exchange reserves continue to hold commodities can significantly improve its investment performance.In order to deal with the uncertainty of the interest policy of the Federal Reserve,the optimal proportion of commodities in foreign exchange reserves should be controlled in the range of 5% - 15%.The research shows that holding a certain proportion of bulk commodities in foreign exchange reserves can improve the asset allocation efficiency of foreign exchange reserves,promote the realization of the goal of maintaining and increasing the value of foreign exchange reserves,and alleviate the high external dependence of key commodity resources to a certain extent.(5)This paper puts forward the management objective of valuation expectation,and introduces it into the multi-objective foreign exchange reserves management model.Based on the forecast of US dollar index,this paper introduces the expected management demand of foreign exchange reserves valuation,and explores the foreign exchange reserves asset coordination model to control the risk of US dollar exchange rate.First of all,it puts forward the expectation model of the trend of the US dollar index,and makes qualitative judgment on the short-term(monthly)trend of the US dollar index;Then,based on the expectation of the trend of the US dollar index,this paper introduces the management objective of valuation expectation,puts forward the corresponding asset allocation model,and empirically tests the allocation effect of the model;Finally,the relevant parameters and assumptions of asset allocation model are tested.It is found that the proportion of foreign exchange reserves in US dollar assets is positively correlated with the price change of US dollar index after the introduction of valuation expectation management target.Compared with the asset allocation model without the introduction of valuation expectation management,the asset portfolio has higher return risk ratio and investment income robustness.It is found that the comparative advantage of the foreign exchange reserves allocation model with valuation expectation is not obvious when the stock index is introduced into the investment scope of the model,which indicates that the foreign exchange reserve allocation model with valuation expectation management demand is more effective in the investment scope of bonds,foreign currency and gold.Compared with the existing research results at home and abroad,the innovations and main contributions of this paper include: first,this paper puts forward the analysis framework of using multi-objective model to construct foreign exchange reserve asset portfolio,and empirically tests the effect of model allocation;Secondly,a CVa R based model framework is innovatively proposed to capture the characteristics of foreign exchange reserve investment and calculate the optimal asset allocation of China’s foreign exchange reserves;Thirdly,this paper discusses the choice of foreign exchange reserve assets,and discusses the feasibility and necessity of introducing bulk commodities into foreign exchange reserves;Fourth,this paper discusses the issue of foreign exchange reserve valuation expectation management,introduces valuation expectation control conditions into the "multi-objective" allocation strategy,and tests the effect of foreign exchange reserve asset allocation.The research perspective is innovative.