Study On Appropriate Scale Of China’s Foreign Exchange Reserves

Foreign exchange reserves are the most important part of a country’s international reserves which haves an essential role for the maintenance of the national economy and financial system stability and to promote sustained and healthy economic growth. Adequate foreign exchange reserves can meet the national government need to regulate the balance of international payments, and pay external debt. Specific to our country, it is the solid backing to ensure regional stability and achieve freely convertible of the Yuan. But the foreign exchange reserves can’t exceed its appropriate scale to much. Excessive foreign exchange reserves will increase the expectation of appreciation of the currency, raise a country’s inflation pressure, affect the independence of central bank’s monetary policy and deteriorate the external trade environment. Meanwhile, as much of our country’s foreign exchange reserves is concentrated in low-yielding financial assets, excess foreign exchange reserves will lead high opportunity costs.Since the exchange rate reform is implemented in1994, our foreign exchange reserves have maintained a high growth rate. At the end of2006, China’s foreign exchange reserves have successfully surpassed Japanese and became the NO.1foreign exchange reserves country. Since then, these high-growth trends continued and our foreign exchange reserves reached a staggering3.18trillion US dollars at the end of2011. The high volume of foreign exchange reserves and its rapid growth has aroused widespread attention and research among theoretical circles. Scientific prediction in China’s moderate foreign exchange reserves scale and thus guiding practice has important implications for the development of national economy and finance. Therefore, many scholars give their own opinions on appropriate scale of national foreign exchange reserves according their research.This paper analyzed the trends and causes of national foreign exchange reserves on the basis of foreign and domestic research on appropriate scale of foreign exchange reserves, then gave theoretical explanations of macroeconomic factors from supply and demand aspects. Furthermore, uses the method of multiple regression analysis to build foreign exchange reserves’actual holding co integration equation in order to measure the size and direction of the impact of macroeconomic factors on the foreign exchange reserves.Finally, this paper established dynamic adjustment model of national foreign exchange reserves on the base of actual holding model and Freckle’s ideas of "non-equilibrium" to calculate the demand of China’s foreign exchange reserves. The results show that China’s actual holding of foreign exchange reserves fluctuate around its demand, and volatility is basically maintained at less than20%.By speeding up China’s foreign exchange system reform, improving the management efficiency of foreign exchange reserves and establishing effective monitoring system on international hot money, we can make foreign exchange reserves play a larger role.