The Industrial Perspective Of The Change Of China’s Foreign Reservation

Foreign reserve is the financial assets that a country or a region can use to pay in the international world. On the one hand,a proper amount of foreign reserve can be used to pay for international debts,to buy international goods and help to keep the exchange rate stable. But on the other hand, there are costs to keep reservation, including possible inflation risks, the exchange rate risks and opportunity costs. Then there is a problem of the proper amount of foreign reservation. However, China’s reservation has been growing rapidly in the resent10years., and keep the largest amount of reservation by the end of2012. So there are theoretical value and practical value to study the reason why China’s reservation is growing so fast.According to the neoclassical economics, the capitals would flow to the developing countries due to the higher developing speeds. This means when the intangible assets flow to China,China would face trade deficit. However, the real situation is that China saw huge favorable balance of trade. And this contradiction where this paper study.By referencing the research result of ZHENSONG(2011),this literature established a theory model contains various firms which reallocate resources under environment of.finance frictions, and concluded that it is the reallocation of financial capital among different firms which caused by the decrease of state owed enterprises(SOE) and the increase of dependent private enterprises(DPE) and foreign owed enterprises(FOE).In the positive part, this literature identifies physical capital flow to be the foreign reserve excluded the FDI or be the current account. Then compare these two items to find which is the better agent for physical capital flow. And this literature used the vector error correct (VEC) model to study the long term cointerration and how the short term fluctuation affect the foreign reserve. The result is:Firstly, the foreign reserve excluded the FDI is more suitable to agent for physical capital flows.Secondly, the increase of DPE and FOE’s proportions is the reason of the increase of China’s foreign reserve. The greater the proportions of the DPE and the FOE, the greater the effect of the financial frictions, so that more financial capital form international reserve which can be called foreign reserve.The first proportion of this paper mainly introduces the topic this paper focuses on is found, the contributions this paper makes,the methods that this paper used,the innovations this paper makes,and the shortcomings of this paper.The second proportion of this paper mainly introduces the involved theories and the past papers in this field. The past papers helps to position the target of this paper.The third proportion of this paper is the theory prove of the paper’s idea. The process of the prove imitates the paper of ZHENSONG(2011).The forth proportion is the practical part of this paper. And the results fits the expected goal,which means the idea of this paper is correct.The last proportion is the summary of this paper.