Research On The Moderate Scale Of Our Country's Foreign Exchange Reserves

Since the reform and opening up happened in 1978, the level of our country's openness was improving continuously and the socialist economic construction had made remarkable achievements. Therefore, the overall foreign exchange reserves of our country were increasing year by year. In 1994, our government had reformed the foreign exchange regime, which resulted in the "double surplus" of current account and capital account in the international balance of payments, speeding up the rate of expansion of foreign exchange reserves. At the end of 1993, China's foreign exchange reserves were only 21.99 billion dollars. However, by the end of 1997, this figure reached 139.89 billion U.S. dollars. Between 1998 and 2000, due to the Southeast Asian economic crisis, the growth rate of foreign exchange reserves had slowed down. However, since 2001, driven by a variety of factors, the growth rate of China's foreign exchange reserves was rapidly accelerated. As the end of December 2010, the balance of China's foreign exchange reserves reached 2847.3 billion dollars. Although adequate foreign exchange reserves can meet the demand of China's foreign trade and government regulation and prevent international debt and financial crisis, the amount of excess reserves will result in excess liquidity in the economy run, leading to inflation and other issues. At this stage, the Yuan continues to appreciate, along with the continuous depreciation of U.S. dollar. So the real wealth of China's foreign currency reserve assets is facing the risk of a sharp drop. At the same time, there is high opportunity cost when the government holds a large scale of foreign exchange reserves, which will lead to the waste of economic resources. As to the appropriate scale of China's foreign exchange reserves, there are differences exists in the current view of academic circles. One view is that the number of China's foreign exchange reserves has been excessive, and the other view is that foreign exchange reserves are not excessive, and even serious enough. From these different theoretical perspectives, we can see that the academic controversy on the appropriate scale of China's foreign exchange reserves is very fierce. And how to determine the appropriate scale of foreign exchange reserves and manage them effectively are also the important issues that our government needs to solve.This paper analyzes the current situation of China's foreign exchange reserves and its economic impact. Then, the author estimates the size of China's foreign exchange reserves using the modified Agarwal model. After these, the paper makes research on the factors influencing the scale of foreign exchange reserves. In the end, on the basis of learning from successful international model of reserves management, the policy recommendations on how to realize the appropriate scale of China's foreign exchange reserves are proposed.