Research On Structure Of China's BOP And Growth Of The Foreign Exchange Reserve

From 1994 to now, China's structure of Balance of Payment has been featured by current account and financial account surplus, and foreign exchange reserve has been increasing for many years. In this paper, a theoretical model is built. In this model, relative price, saving rate, technology progress rate in tradable department comparing with non-tradable department, and foreign direct investment are all included to explain trade balance. Comparing 1985-1993 period with 1994-2005 period, we found that high level of FDI inflow after 1993, rapid technology progress rate of tradable department comparing to non-tradable department and a non-timely adjustment of exchange rate are main reasons driving China's persistent trade surplus after 1994. Regional advantages are main reasons in attracting FDI into China. In recent several years, the expectation of exchange rate appreciation is main reasons of driving illegal capital flight. Foreign exchange reserve, as an absorber of excessive supply or demand in foreign exchange market, will continue to increase with current account and financial account surplus.In the long run, they are not offset among good trade account, serve trade account, investment income account and foreign direct investment account, therefore the sustainability of structure of Balance of Payment and foreign exchange reserve is not maintained. It will improve the structure of BOP to adjust policy of FDI and China Direct Investment and appreciate exchange rate. Following it, the increasing foreign exchange reserve will decrease.