Analysis On Scale, Determinants And Countermeasures Of Foreign Reserves In China

International reserves lies in the core of international monetary system and is also an important problem in international finance which concerns one nation's ability to regulate international payments and to stabilize exchange rates and attracts the most attention of nations. With the fading effects of 1997 financial crisis in Asia, both current account and capital & financial account have maintained persistent surpluses since 1999. Correspondently, Chinese international reserves, mainly foreign reserves, have accumulated quickly. Till the end of 2007, the total amount of Chinese foreign reserves has reached to US$1.76 trillion, which surpassed the sum of the largest seven industrial countries, USA, Japan, England, Germany, France, Canada and Italy.This huge amount of foreign reserves enhances the nation's ability to pay abroad and repay foreign debts, to attract the foreign investment and decrease the financing costs, to strengthen the central bank's ability to intervene in foreign exchange markets and maintain the stability of foreign exchange rates, and to ensure the economic and financial security. On the other hand, the large amount of foreign reserves has aroused a series of problems. For example, the increased base money for foreign reserves in central bank's balance sheet has limited the independence and effects of central bank's monetary policies. Besides, RMB appreciation out of large amount of foreign reserves has impeded the foreign trade and the opportunity cost of foreign reserves has decreased the efficiency of economic resources. Now these problems have attracted wide attention in the society. Whether the scale of Chinese foreign reserves is appropriate, what effects they would have on domestic economy and financial security, and how to mange these foreign reserves, these have become the core of theoretical and progamatic fields. This paper aims to find out the answers to these problems. Bsed on this standpoint, the structure of this paper is organized as the followings.The first Chaper is an introduction. First, the purposes and meansings of research of this paper are presented, followed by research focus and main innovations in this paper. Finanaly this chaper reviews relevant literature and their main methods and conclusions with regard to optimum foreign reserves and their determinants.The second chapter empirically analyzes the evolution and status quo of Chinese foreign reserves. The ratio analysis shows that the scale of Chinese foreign reserves istoo high compared with the reasonable levels.The third chapter uses the cointegration method in ecnomtrics and relevant data to empirically analyze the impact of GDP, import and foreign debt on the scale of our foreign exchange reserves. The econometric analysis shows that there exsists long-term equilibrium relationship between foreign reserves, foreign debts and GDP. Among the three important factors, GDP plays a crucial role in stimulating the growth of our foreign reserves. Besides, GDP and foreign debts have positive effects on foreign reserves, while import has a negative effect. However, the effects of all of the three determinants are larger than one.Chapter four analyzes both the positive and the negative effects of our huge amount of foreign reserves. Although enough foreign reserces are important to enhance the nation's ability to repay debt and make foreign payment, the negative effects of our large amount of foreign reserves on domestic economic and financial performance are worth of much more attention.Chapter five puts forward a series of policies toward future foreign exchange managements.The main innovations of this paper lies in the usage of both theoretical and empirical methods and the newest data to comprehensively analyzed the scale and determinants of our foreign reserves, based on which correspondent suggestions are proposed.