The Cause Of China’s Massive Foreign Exchange Reserves And Its Solutions

Foreign exchange reserves is held by a government and some international reserves assets in foreign currency portion of that debt denominated in foreign currency holdings of a country’s government. Foreign exchange reserves is a major component in International reserves, also an important part of the country’s economic strength. Foreign exchange reserves can be used for balancing the payments, stabilizing the exchange rate and resisting financial risks. The main part of China’s foreign exchange reserves is dollar assets. As China’s economic developing and the enhancing of comprehensive national ability, China’s total imports and exports increased year by year, foreign exchange reserves also increasing rapidly. Until February 2006, our country’s foreign exchange reserves surpassed Japan’s, since then China has been maintained the first in the world, far more than the size of the other countries.Since the 2009 financial crisis, China’s foreign exchange reserves almost doubled in five years, as of June 30, 2014, China’s foreign exchange reserves reached $ 3.99 trillion, the highest number up to now. China’s huge foreign exchange reserves mainly from the long-standing "double surplus", that the current account, the capital and financial account surplus in the same time.As of the end of December 2014, the scale of China’s foreign exchange reserves reached $ 3.84 trillion. In 2014, China’s current account surplus continued to maintain, and the capital and financial account deficit once again, the annual international payments almost achieve balance, which changed the "double surplus" situation exist in our country for a long time. The second half of 2014, China’s foreign exchange reserves has decreased, which is mainly caused by the dollar factor. While residents and businesses’ will of settlement of exchange declined, the will of holding exchange increased, and short-term capital outflows are the other factors about the reduced of foreign exchange reserves in the second half year. In 2014 the increment of foreign exchange reserves only $ 21.7 billion, failing to maintain the rapid growth state in the past, incremental gradually stabilized.Reasons for the rapid growth of China’s foreign exchange reserves also include the reform of the foreign exchange management system. Before 1994, in our country there existed two systems which were the official exchange rate and the market regulating system. This period called Double track pricing system and our country adopted the foreign exchange retained system. In early 1994, China abolished foreign exchange retention system, carried out the banking exchange system, and beginning the compulsory settlement system period. In August 2007, our country ended the 13-years of compulsory settlement system, replacing the wishes of the settlement system.In 1994, the country has established a market-based, single, managed floating exchange rate regime, the official exchange rate and the market regulating system merged; July 21, 2005, China began to implement a market-based, with reference to a basket of currencies, a managed floating exchange rate regime, RMB is no longer single pegged to the dollar, the exchange rate reform to enhance the flexibility of RMB exchange rate. Due to the appreciation exception of RMB, a lot of hot money inflows in China which is another source of China’s foreign exchange reserves.At present, China’s foreign exchange reserves has far more the modest scale. How much of a country’s foreign exchange reserves held by the level considered reasonable, there are no uniform standards in China and abroad, but under normal circumstances the appropriate scale of foreign exchange reserves is determined by the following four key requirements: maintain the import demand, the abroad investment demand, intervention in foreign exchange market demand and the external debt service demand.Excessive foreign exchange reserves increased the appreciation pressure of RMB. But because of the lack of flexibility of the exchange rate regime, under the impact of China’s current monetary policy, the RMB value in the domestic market is devalued, but in the international market is rising.The structure of our foreign exchange reserves is lack of diversity, there is a big risk. In 2010, "China Securities News" has revealed the news: Our foreign exchange reserves has $ 2.45 trillion of USD, the proportion is about 65 percent, the rest part including 26 percent’s Euro, 5 percent’s GBP and 3.5 percent’s JPY. The risk of fluctuations in the US dollar has become the major risk faced the country’s foreign exchange reserves. In addition, China’s foreign exchange reserves is held as a state of high cost and low return on investment. Because China purchases of US Treasury bonds at a large-scale, the average income is only about 5%, while the yield of Foreign Direct Investment in China obtained generally around 10%.Moderate scale of foreign exchange reserves can not only enhance the country’s macro-control ability, but also conducive to the maintenance of a government’s credibility in the international community, to prevent and resist financial risks. But foreign exchange reserves is not the more, the better. This paper based on China’s current foreign exchange, analysis the rising of China’s foreign exchange reserves in recent years, the reasons for the increase and the followed problems, and the relevant solutions. In order to solve the problems caused by the huge foreign exchange reserves, our country may be appropriate to reduce the government, businesses, resident’s saving rates, and promote the appreciation of the RMB appropriate to reduce foreign exchange reserves; besides appropriate to reduce the size of foreign exchange reserves, China also should adjust every currency’s proportion in foreign exchange reserves to maintain a diversified structure; using the foreign exchange reserves timely and effectively, choosing reasonable direction of investment, using foreign exchange reserves by multi-channel. At the background of Chinese enterprises "going out" strategy, we can take advantage of a number of large foreign exchange reserves to support non-state enterprises to invest overseas; using foreign exchange reserves to build reserves of oil, natural gas, iron ore and other strategic resources sector; increasing gold reserves appropriately to enhance the proportion of gold in reserves assets among the country; at the same time relying on strong foreign exchange reserves to vigorously promote the RMB internationalization process.