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

Foreign exchange reserves, serving as a "buffer" in a country's financial system, refer to the foreign exchange part of the international reserve assets held by a country's government and the assets that are held by a country's monetary authority and may be exchanged into foreign currency at any time. Before 1994, our foreign exchange reserves always remained insufficient, but since 1994, when China realized the unification of Renminbi exchange rates and started to carry out the mandatory exchange settlement and sales system, our foreign exchange reserve began to continually grow rapidly. Especially our access to WTO in 2001 sped up the enlargement of the size of foreign exchange reserves due to the favorable balance in both current account and capital account. Until 2009, our foreign exchange reserves had reached 2.3992 trillion US dollars, the largest in the world. That shows our country's economy is becoming strong.Certainly, sufficient foreign exchange reserves are a foundation for a country's balance of international payment, and may be used to intervene in currency market, stabilize exchange rate, guard against financial risks and etc., signifying the national economic strength. However, excessive foreign exchange reserves will leave resources idle, aggravate inflation, increase the difficulty of effectively implementing monetary policy, further devalue foreign exchange rate and so on, not good for the development of national economy. So, it is of importance to probe into the appropriateness of the size of foreign exchange reserves.So based on our actual situation, this paper improves the Agarwal Model as a base to hereby conduct empirical research on the appropriateness of our size of foreign exchange reserves, analyzes the data in 1994-2009 and estimates the appropriate size of each part by costs and benefits, and after summing up, gets our appropriate size of foreign exchange reserves, and then compares to our actual size of foreign exchange reserves in these years, and thereby concludes that since 2004, our actual reserves have started to exceed estimated appropriate reserves or the total costs for reserves are greater than total benefits, and even the excess amplitude is showing a state of growing year after year.To further analyze the reasons for our huge foreign exchange reserves, this paper conducts analysis on the influencing factors that cause this state on the quantitative aspect. According to our current actual situation, this paper selects IOP, DEB, FE, GDP, and FDI as independent variables and FR as dependent variable to set up regression equation, uses Eviews software to make linear regression, but because of serious multicollinearity between variables, uses method of regression to revise and finally obtains the regression equation that meets economic theory and has prominent integral. And last the paper analyze the empirical results.In the long term, the actual situation of excessive foreign exchange reserves in China is not beneficial for economic development, so, in the last part, this paper proposes relevant policy suggestions for how to manage and use current foreign exchange reserves so that our huge reserves can achieve the effect of maintenance and appreciation of values as to realize the sustainable and healthy development of our economy.