A Reasearch On The Optimum Scale Of Chinese Foreign Exchange Reserve

Owing to the continual growth of economic development and the gradual openness of China, foreign exchange reserve becomes an important factor that firmly influences the macro-economy. Foreign exchange reserve is not only a core of the international monetary system, but also an important matter of the international finance field. It concerns the ability that various countries regulate the international revenue and expenditure and monetary exchange rate of stability, which has been receiving general concerns of international financial institution and governments of various countries all the time. With the obvious tendency of double surplus of Chinese balance of payments, the foreign exchange reserve has increased sharply for the recent years. At the end of 2006, the foreign exchange reserve of China was the top of the world, which surpassed Japan and exceeded one trillion dollars. Therefore, studying on that whether the scale of Chinese foreign exchange reserve is optimum is becoming a hotspot in the macro-economy research, and setting up the reasonable scale of the foreign exchange reserve is the important insurance of healthy, stable and sustainable development of Chinese national economy.The first part of this essay synthesizes the research results about the theoretical analyses of foreign exchange reserve as theory background and summarizes the merits and demerits of different demand theories of the foreign exchange reserve at home and abroad, such as Ratio Analysis Method, Demand Function Method and Cost-benefit Analysis Method. On the basis of it, this essay analyzes whether the scale of Chinese foreign exchange reserve is optimum by empirical research considering the situation of China. This part will especially focus on the effects on macro-economy and analyze the relationship between foreign exchange reserves and macro-economy in detail from several different angels. This essay studies the relationship between inflation effect and supply of basic money of foreign exchange reserve increase from short-term and long-term two visual angels by using econometrics on the basis of the statistical data of 26 years. Then it analyzes the impact of proliferation of foreign exchange reserve on the monetary policies. Following that this essay chooses the modified Agarwal model to calculate welfare effect of foreign exchange reserve according to the data between 1994 and 2005, analyzing cost and benefit of foreign exchange reserve fundamentally. Finally, choose experiential method by using the R/M Ratio Analysis Method and R/D Ratio Analysis Method to demonstrate that whether the whether the scale of Chinese foreign exchange reserve is optimum. From the results of the above empirical researches, we can conclude that the scale of Chinese foreign exchange reserve has appeared to be excessive. The great amount of foreign exchange reserve indicates rising status of Chinese economy and strengthening resistance to international financial risks. Meanwhile, we should see that foreign exchange reserve also is a "double-edged sword", which is not the more the better, excessive foreign exchange reserve may give birth to a negative effect on the operation of Chinese economy. The last part of this essay states the management models of foreign exchange reserve of Southeast Asia and Norway. By comparing the management models and using the advantages for our country's reference, the essay proposes the guiding recommendations to administer foreign exchange reserve of china. At last the essay suggests we should pursue the benefit of foreign exchange reserve on the condition of the realization of the aims of foreign exchange reserve management-liquidity and security.