China's Foreign Exchange Reserves, Moderate Scale Analysis

As it is one of the most important macroeconomic and financial variable, foreign exchange reserve reflects a country's economic and financial strength, and it makes great effect on the adjustment of balance of its international payment, maintaining stabilization of currency exchange rate, defending its international prestige and other aspects which cannot be neglected, especially under the current background of economic integration, foreign exchange reserve acts more and more important role in protecting one country's economic and financial security. Also, it makes great impact on macroeconomy of a country by releasing large scales of base currency,and it has been receiving close concerns of most financial institution and government of virous countries. As the trend of trading surplus and FDI inflowing has sustained for long, the foreign exchange reserve of China has been increasing rapidly in recent years, and at the end of Feb 2008 it has amounted to $ 1647.1 billion.Facing the quick surge of the foreign exchange reserve scale, we have a series of problems that needs to seriously consider. Why it happens? What kinds of impact will large scales of foreign exchange reserve makes on our economy? How to balance the advantage and disadvantage which it produce? What is the most fitness scales of our foreign exchange reserve which we needs? How to control the scales and trend and how to strength the management of our foreign exchange reserve?This logic has been run through the whole text. In the first part of this text, the author firstly explains some important terms which might related to the study of the scale of foreign exchange reserve, for example, international reserve,foreign exchange reserve, foreign exchange and the difference among them. Meanwhile, the author distinctly definite the moderate scale of foreign exchange reserve, that is a scale which is in accordance with our own economic situation and will soundly meet the three basic functions of foreign exchange reserve. Besides that, the author roundly looks back the development course and seriously discusses the main causes of the fast growth of our foreign exchange reserve since the Reform and Opening up. In the second part, the author summarizes the main demand theories of foreign exchange reserve and its pluses and minuses, which will be helpful to the empirical analysis. In the following part is the empirical analysis part, following the advice given by Professor Chen Biao Ru in his book, the author generally use several methods to make empirical analysis. So multiple linear regression is firstly used to find out the core factors that affect the demand of foreign exchange reserve, and ratio analysis approach is then use to further analyze the explain ability of the regressed core factors. After that, the author modifies the Agarwall model to fit our own economy situation and calculate the moderate scale of the foreign exchange reserve of our country and draw a conclusion that the scale of foreign exchange is excessive. In the fourth part, the author discusses the positive and negative effect that excessive foreign exchange reserve brings on the development of economy. For the negative effect have to some extent been made harmful impact on our economy, the author suggests some practical and feasible ideas on the scale control and management of foreign exchange reserve.