Study On The Moderate Scale Of China's Foreign Exchange Reserve

Foreign exchange reserve is the most important component of the international reserves. Under the current background of economic Globalization, foreign exchange reserve acts more and more important role in adjustment of balance of its international payment, maintaining stabilization of currency exchange rate, protecting one country's economic and financial security. Foreign exchange reserves is not only the key indicators of a inspecting country's economy operation, but also impact on macro economy of a country by releasing large scales of base currency, Foreign exchange has been receiving close concerns of most financial institution and government of various countries.Since RMB exchange rate merged in 1994 ,China has established market-based, single, managed floating exchange rate system and maintain the long-term stability of the RMB By the end of 2007 China's foreign exchange reserves was up to more than 1.5 trillion. As a funds-lacked developing country, which effectively helped China avoid Asian financial crisis and stabilize the foreign exchange rate. But the keeping increase of foreign exchange reserve will still result in negative influence to the macroscopic economy movement. China's foreign exchange reserve cost of ownership is very large. How to deal with the pressure of RMB appreciation, and better promoting China's economic development, which ordered us to solve the modest size of the foreign exchange reserves.On the basis of foreign exchange reserve scale theory, this paper analyses the foreign exchange reserve increase in China about the supply and demand factors. First, according to the Agarwal model, Wu Jian model and China's situation, a new moderate determination model is constituted. The model took into account the impact of the foreign exchange reserves such as transaction demand, regulatory requirements, debt service demand and profitability needs. This model adapts to practical status of China. It is used to analyze China's 1990-2006 foreign exchange reserve. The result shows that foreign exchange reserve is excessive of the moderate scale in the last few years. Based on this result, this paper analyzes the causes of foreign exchange reserve's increase. By introducing the dependent variable such as GDP, Net Export, Foreign Direct Investment, exchange rate and M₂, this paper establishes a model to test the effect on foreign exchange reserve increase by these variables. The result shows that foreign exchange reserve's increase is mainly influenced by the variables of GDP ,Foreign Direct Investment and M2.At last, this paper puts forward related policy measures such as increasing imports and foreign investment, strengthen the supervision on foreign hot money, enhance China's foreign exchange reserves risk management, and improve the RMB market-oriented based on the former analysis, wishes to supply a beneficial reference.