The Research On Currency Composition Management Of Foreign Exchange Reverses

After the collapse of the Bretton Woods system in 1970s, the international reserve currency diversification trends have emerged, the currency used in reserve assets changed from a single dollar into U.S. dollar-based, co-existence of other strong currencies. Particularly in the birth of the euro, the euro assets has been widely accepted by the international community as one of the most important assets in international reserve, the importance of U.S. dollar have a further decline in status.Since the exchange rate system reform in 1994, China's foreign exchange reserves has been increasing. From 1994 to 2008, the average annual growth rate is 30.44%. In particular, after the exchange rate system reform in 2005, the growth rate of foreign exchange reserves is faster and faster. The average annual growth rate of foreign exchange reserves in 2005,2006,2007 and 2008 is as high as 33.78 percent. As of December 2008, China's foreign exchange reserves reached 1,946,000,000,000 U.S. dollars, ranking first in the world. This large long position reflects that China faces huge risks. Therefore, as China's foreign exchange reserves rapidly increased, the management of foreign exchange reserves has become increasingly concerned about.This article attempts to use factor analysis method, considering the structure of foreign trade, foreign debt structure, foreign investment structure, and reserve currency risk and return, reserve currency's international status and exchange rate regimes, study the structure of China's foreign exchange reserve currency optimal allocation.This content and structure is as follows:Chapter 1 is Literature Review about the currency composition management. It also introduces,the framework, the main innovations and shortcomings of this article.Chapter 2 introduces the evolution of the world's foreign exchange reserves. Then we choose US dollar, yen, euro, Pound sterling as the main currencies of China's foreign exchange reserve. Finally, we describe the potential risks of China's foreign exchange reserve status quo.Chapter 3,according to our status quo, we choose 7 factors which affect the composition of foreign exchange reserve on the base of related theories and researches. They are as follows:the share of foreign trade, the composition of external debt and foreign investment, the risk and yield of reserve currencies, the exchange rate arrangement and international status of currencies.Chapter 4 is the empirical analysis of China's foreign exchange reserves. This chapter first introduces the factor analysis model and the basic steps of factor analysis. Then establish an index system according to the analysis in chapter 3. Finally, the optimal composition of reserves is figured out using factor analysisChapter 4 is the empirical analysis of China's foreign exchange reserves. This chapter first introduces the factor analysis model and the basic steps of factor analysis. Then establish an index system according to the analysis in chapter 3. Finally, the optimal composition of reserves is figured out using factor analysisChapter 4 is the empirical analysis of China's foreign exchange reserves. This chapter first introduces the factor analysis model and the basic steps of factor analysis. Then establish an index system according to the analysis in chapter 3. Finally, the optimal composition of reserves is figured out using factor analysisChapter 5, we firstly analyze the necessity of structural adjustment of the Currency Composition of China's foreign exchange reserve, and then we provide suggestions on foreign exchange reserve arrangement comparing the actuality to our empirical study results.The main innovation of this article is to propose a new methodology to calculate the optimal currency composition of foreign exchange reserve.