A Research On The Risk Management Of China's Foreign Exchange Reserve

China's foreign exchange reserve increased dramatically in recent years and the number reached 133.26 billion dollars up to June 2006. Its number is not only surpassed the Japan and also ranked first in the world. The management of the larger number of foreign exchange reserve arouse our attention and the most important problem is the risk management and control, the optimization of the foreign exchange reserve structure and the reduction of foreign exchange reserve's holding cost. So with the big number of China's foreign exchange, the relatively single form of the assets and the low efficiency of foreign exchange management efficiency, how to use foreign exchange reserve effectively, reduce risk and the improve the management of foreign exchange reserve has become a matter of high priority. And we need to analysis the problem according to the real situation of the China's foreign exchange reserves, and then make suitable strategies to avoid the risk.This paper analysis the management of large number of China's foreign exchange reserve and use the method of textual description and empirical analysis, besides the paper provide a large number of econometric model and charts to describe the scale, the structure and the portfolio of China's foreign exchange reserve. The article also analyses the management system of China's foreign exchange reserve. Finally, get the method about the management of China's large number foreign exchange reserve and provide forward proposal about risk management of China's foreign exchange reserve.This thesis includes four chapters. In Chapter One (Introduction), the theoretical and practical significance of this subject is introduced, relevant studies from home and abroad are outlined and the main viewpoints and the author's creativity are given. The paper point out that most important of the foreign exchange risk management are scale risk management and the structural risk management. To the risk caused by the scale, the article holds the view that the far too big and small number will bring the problems such as waste of resources, inflation, basic currency increase as well as incapacity of the international payment and export payment and then increased destabilizing factors to China's economic and trade development, so the risk need to be managed. To the risk caused by the structural mainly including the currency structural and the ratio of them and the form of reserves. Besides, the risk management of China's foreign exchange reserve include the risk management system, which include the China's foreign exchange reserve of the risk management system whether adjust to the economic development and whether the risk management is adjust to the China's macroeconomic.As the background introduction part Chapter Two tells about the history of China's foreign exchange reserve and the theories about the risk management. When mentioned the risk management of foreign exchange reserve, the security is very important. As the China's foreign exchange reserve increased, in the environment of the float exchange rate and the complicate and changeable international financial market, the value of foreign exchange reserve is usually controlled by one country's economic situation, the monetary policy, the change of currency status and so on. Meanwhile, security is not only ask us to prevent the risk of exchange rate and interest rate, but also the risk of change, circulation and convertibility as well as the storage of it. Chapter Three and Chapter four is the major of the full text, in the two parts, the article analysis the scale and structural risk management. In chapter three relevant studies from home and abroad are outlined and varies ways to check whether the foreign exchange is over-weighted is introduced, the factors which contribute to the large scale is summed up. Then the conclusion that China's foreign exchange reserve is too large and there is scale risk is made. Also, the chapter sum up the reason about it: firstly, the direct reason is that the international trade and FDI promoted the double surplus. Secondly, there are policy and macro economical reasons. And then use the empirical analysis of measurement model to analysis the factors that affect the scale of foreign exchange, and get the conclusion. Finally, the paper provides some useful advice in solving the risk management of foreign exchange scale.Chapter Four introduces the structural risk management of foreign exchange. Firstly, the chapter introduces the theory about the structural management and categories as the currency management, the assets management and non-financial assets management. Then summarize the native and aboard model and analysis the relative econometrics analysis. A conclusion about the currency risk management is got: above all, adjust the dollar's ratio in China's foreign exchange reserves. Then improve the Euro dollar's percentage. Besides, according to Pound's stable exchange rate, low reserve risk, the percent of Pound need to be improved. The chapter also analysis the arrangement of the asset form, in the paper the asset is cataloged as financial asset and non-financial asset. The arrangement of the asset has some risks and need to improve. Finally, a conclusion about the structure risk management about the foreign exchange reserve is reached. A conclusion of this paper is given in the last part of the paper: China needs to adjust its foreign exchange management strategy to control the foreign exchange reserve. China needs to make a good arrangement of the over-weighted foreign exchange reserve and promote the further foreign exchange system reform. Also the government need to develop new form of reserves. Secondly, the government needs to enlarge the exchange floating scale, reduce the capital account management and enlarge the capital account. Besides, China needs to reduce the number of foreign exchange as well as increase the gold reserves. Finally, China's large number of foreign exchange management is not wholly relies on the scale management, but the structural management and adjust its management strategy.