China's Foreign Exchange Reserves, Exchange Rate Risk In The Existing International Monetary System Research

China's foreign exchange reserves grow rapidly in recent years. China surpassed Japan in 2006 and became the country with world's largest foreign exchange reserves. High foreign exchange reserves indicate China's increasing overall national strength, but China suffers huge exchange rate risk because of the fluctuations of currencies' price. Under the current international monetary system, floating exchange rate arrangements make fluctuations become normal; the unequal rights and obligations compel countries outside the monetary system passively exposed to exchange rate fluctuations; exchange rate risk has not been effectively controlled in lack of supervision from international financial institutions. In short, not only in China, but also many developing countries with large foreign exchange reserves are faced with the problem of exchange rate risk.This paper analyzes the shortcomings of existing international monetary system and proposes the root of exchange rate risk, combined with quantitative easing policy implemented by developed countries after economic crisis. Meanwhile, China's foreign exchange reserves have defect of overlarge scale and high ratio of dollar assets, which not only may face capital loss from exchange rate fluctuations and foreign currencies devaluation, but also bear capital loss from the reducing return on reserve assets. Considering main currencies of China's foreign exchange reserves are U.S. dollar, euro, yen and sterling, the paper utilizes the latest published currency price by the Administration of Foreign Exchange and uses VaR method by establishing GARCH models in empirical research on foreign exchange risk. The results show that the euro, yen and pound have normal price fluctuations, while dollar has the smallest volatility. It comes from the "hard peg" to dollar exchange rate system implemented by China these years, and the peace situation will be broken when the system quits and the RMB exchange rate formation perfects in future, in which case the value of reserve assets will be adversely affected. Based on the theoretical analysis and empirical research, the paper puts forward some policy recommendations, including reducing the proportion of dollar-denominated assets appropriately, increasing the proportion of the euro and yen assets appropriately, changing foreign exchange reserves into commodities or purchasing assets of the United States in China, so that to reduce the exchange rate risk.