The Study On Appropriate Amount Of China’s Foreign Exchange Reserve

The foreign exchange reserves of China have been accumulated very quickly since we enteredthe21st Century. China exceeded Japan in February2006and became the country who has the largest scaleof foreign exchange reserves all around the world. In the same year, the foreign exchange reserves becamemore than one trillion dollars. And it became3311.6billion dollars when we came to the end of2012. Thelarge amount of foreign exchange is of beneficial for China, including the assurance for internationalcredits, enhancement of our ability to pay off in the world, support for the development of our economyand be helpful for our balance of payments. However every coin has two sides. The large amount of foreignexchange reserves brings challenge for us as well as opportunities. The large amount means we have to paymore for them. Besides, it also bring us potential inflationary pressure. So we should make study on theappropriate scale of the forging exchange reserves, and find a model fit for China.The article makes introduction for some items such as foreign exchange reserves, andaccumulates and classifies these study since1940s. We can classify the methods into proportion analysismethod, cost-profit analysis method, regression analysis method and so on.The Agarwal Model was constructed by Agarwal especially for developing countries consideringthe deficit and the idle resources in these countries. Agarwal holds the opinion that when the foreignexchange reserves of a developing country can meet the need of international trade and the short-termadjustment of the Balance of Payment, the cost of the foreign exchange reserve equals the profit of thereserves, then the amount is appropriate for the country.But it is easy for us to see that in the Agarwal Model, it does not take the other need into consideration. So this article considers about the practical condition of China, and constructs a modifiedmodel including the need of international payments, FDI profits run-back and the stability of currency rate.Then use the adjusted Agarwal Model to calculate the appropriate scale of the foreign exchangereserves in China from2001to2011. We can calculate the appropriate area for foreign exchange reserves.The result of the study shows that the foreign exchange reserves China holds during the early10years areall larger than the appropriate area. Though it is in the appropriate area in2011, it is still larger than themiddle statistics.The large amount of foreign exchange reserves bring us opportunities as well as challenges. It cando much to help the adjustment of the Balance of Payment in our country, and enhance the ability ofpayment for China in the world. On the other hand, it brings us larger cost and the pressure to make theRMB currency rate to go higher. As a result, we should take measures to make appropriate management forour foreign exchange reserves. Our government should make an acceleration of currency rate reforms andpush the course of China capital convertibility.