The Study On The Foreign Exchange Reserve Management Of China

Foreign exchange reserve is the main part of the international reserve. It's an important financial instrument for government to intervention in the foreign exchange market and maintain exchange rate stability, but also reflects a country's ability to resistance the international financial risks, the size of the. The foreign exchange reserve has been developed very fast since the reform of the system of foreign exchange management in 1994 in China. At the end of February in 2006, the total scale of it has surpassed Japan for the first time and becomes the largest foreign exchange reserve holder in the world. The remaining sum of foreign exchange reserve has reached 2131.606 billion US dollars up to June 2009. Sufficient foreign exchange reserves play an important role in regulating the balance of payments, maintain the stabilization of exchange rate, maintain international reputation and enhance the ability to resist international financial risks. However, such a huge amount of foreign exchange reserves has brought a series of problems to the economic development of our country, and which sets a higher request to foreign exchange reserve management of our country.This paper provides a brief overview of the current situation about foreign exchange reserves management literature in domestic and foreign. Based on the current situation about foreign exchange reserve management of our country, this paper analyzes the reasons why China's foreign exchange reserves accelerated in recent years, as well as the adverse effects brought by such huge foreign exchange reserves. Then, this paper theorizes about the moderate scale of foreign exchange reserve of our country. First, this thesis analyzes the factors which impact the demand of foreign exchange reserves. Then this paper uses the data available to conduct a empirical study between the demand of foreign exchange reserve demand and some influence factors to arrive at a long-term equilibrium relationship between them.Then, this paper estimate the moderate scale of China's foreign exchange reserves based on the basic functions of foreign exchange reserves and obtained the conclusion that China's foreign exchange reserves have far exceed the modest scale.After that, this paper provides an analysis on structure management of foreign exchange. Unlike existing literature, this paper takes into account the effects on foreign exchange reserves risk-return of the currency structure and asset structure simultaneously. Through constructing different portfolios, thepaper tests the impact of diversification of reserve assets on income and volatility of foreign exchange reserves. The study finds that by extending the maturity structure of investments, increasing the proportion of equity investments, and making the currency distribution of reserve assets distribution more balance, such strategy can increase the investment income of foreign exchange reserves portfolio, and enhance the returns rate faster than volatility, which provide the feasibility that through optimization reserve assets structure to enhance the investment return of reserves.At last, the paper puts forward a series of proposals for foreign exchange reserve management reform of our country. First, china should divides foreign exchange reserve into different categories according to liquidity needs as well as hands over different categories reserve assets to different agencies, in this regard, we can learn from Singapore and other country's experience on reserves management.Second, china should adjust the currency structure of reserve assets more balanced and improve the transparency of the management of reserves. Finally, Speed up the process of internationalization of the RMB, abandon exchange controls.