The Research On Structural Optimization Of China’s Foreign Exchange Reserve Currencies

China made a reform on exchange rate system in2005, monetary authority announcedto adopt the floating exchange rate system which is based on market supply and demand,and refers to currency basket. Since then, the composition of the reserve currency basketbecame a hot issue among foreign and domestic researchers as well as foreign monetaryauthorities. In the thesis, I start from analyzing four elements which may have impacts indeciding the basket: trade structure; FDI; economic strength; special drawing rights. Then Icalculated the weights of every currency based on single factor and came up with thirteeninitial currencies which maybe construct China’s reserve currency basket. After that, I usean empirical analysis method----multiple regression analysis to calculate the correlationcoefficient between the rate of CNY exchange rate changes and other13exchange ratechanges during2005-2009, with the conclusion that GBP, CAD and THB had little impacton CNY’s exchange rate changes compared with other10currencies. Therefore, I keptUSD, JPY, EUR, HKD TWD,SGD,RUB, AUD,MYR in China’s reserve currency basket,with a weight of29%,14%,14%,11%,9%,6%,4%,3%,2%,2%respectively.Because China just nominally adopted the exchange rate policy referring to currencybasket, but actually still consider USD as the major reserve asset. Currency basket is still aweak consideration in China’s exchange rate system. The depreciation of USD will triggera huge lose of China’s foreign currency reserve asset value. Therefore, the policy advice isas followed, Central bank should seriously consider and raise up the importance of thebasket then it comes to the determination of exchange rate system, making the changingtrend of CNY exchange rate reflect the currency basket more closely. Specifically speaking,USD proportion should decreased to30%, other currencies such as KRW,TWD,SGD,RUB,MYR should be increased due to the frequency of economical activitiesbetween China and Korea, Taiwan, Singapore, Russia and Malaysia. Only in the way canwe lower the risk of foreign exchange reserve asset shrink and improve the RMB exchangerate formation mechanism.