A Study On The Appropriate Scale Of China's Foreign Exchange Reserve

Since the reform of the foreign exchange management system in 1994, China's foreign exchange reserve scale has enlarged rapidly. In February 2006, China's foreign exchange reserve amounted to 853.6 billion US dollars, surpassing Japan for the first time, and China became the world largest foreign exchange reserve holder. At the end of 2009, China's foreign exchange reserve exceeded 2 trillion US dollars, reaching to 2.399 trillion US dollars.China's large scale of foreign exchange reserve, on the one hand, has brought stabilizing factors for the economic development of China; on the other hand, it also has the adverse influences, like increasing the cost of foreign exchange reserve, influencing negatively on the money supply. Particularly under the international background, the foreign exchange reserve is confronted with such risks as greater depreciation of foreign exchange reserve and the decrease of yield rate.This paper introduces researches of scholars in China and abroad on the appropriate level of foreign reserves, it also elaborates the reason of rapid expansion of China's foreign exchange reserve from its structural origin, macro-economy, as well as foreign exchange management system. After taking empirical study with the multiple linear regression model on the factors which have influence on the foreign exchange reserve scale, it points out that external debts,economy and export are the main reasons for the grow of foreign exchange reserve. It analyses the appropriate scale of China's foreign exchange reserve with the ratio analysis and Agarwal model. After that it calculates appropriate scale with the improved Agarwal model, and points out that the appropriate scale in 2008 ranges from 774.1275 billion US dollars to 1416.089 billion US dollars, while the actual foreign exchange reserve in 2008 is 1946.03 billion US dollars, indicating that at present China's foreign exchange reserve has already surpassed the appropriate level.Finally the paper analyzes the influences of such large foreign exchange reserve scale on China from pros and cons, pointing out that its disadvantages outweigh advantages. Then it proposes several suggestions for management reinforcement for China's foreign exchange reserve from the control of its level, reform of foreign exchange management system as well as adjustment of the structure.