China's Foreign Exchange Reserves, An Appropriate Scale

In 1994, China reformed it's foreign exchange administration system. Since then, our foreign exchange reserve has kept on increasing. At the end of June 2005, the scale of Chinese foreign exchange reserve has reached more than 700 billions US dollars, China has become the second largest foreign exchange reserve holder in the world after the Japan. Under this background, Chinese foreign exchange reserve becomes the focus of the whole world. At the same time, the issue of appreciation of RMB begins to become very severely.This paper focuses on the foreign exchange reserve scale of China, discussing about moderate reserve scale of China and the selection of Policy. At first, this Paper introduces the general knowledge of foreign exchange reserve and theoretical summary related to foreign exchange reserve. Based on the analysis of Chinese exchange rate mechanism, this paper gives us explanation about institution designing that Chinese foreign reserve has been keeping on increasing quickly in the recent years. After detail analysis of the key economical ingredients about demand for foreign reserve, a long term model and a short term model about China's foreign reserve are presented and tested. Through fully catching on the meaning of moderate scale of China's foreign reserve, this paper establishes a varying range of moderate reserve and gives us the conclusion that foreign reserve scale in China is excessive. At last, after analyzing of the good and bad effects of excessive reserve ,the author makes policy suggestions about how to make China foreign reserve be moderate.