Research On The Appropriate Scale Of China's Foreign Exchange Reserves

Foreign exchange reserve refers to the high-liquidity credit which is held by other countries' monetary authorities and can be converted into other countries' currencies at any time.It can be used to adjust the international balance of payment,maintain the stability of the domestic currency exchange rate,and protect international reputation and so on.Holding a moderately-sized foreign exchange reserve has enormous benefits for the operation of the national economy,such as stabilizing the RMB exchange rate,promoting the internationalization of the RMB,enhancing China's economic strength,and protecting China's international reputation.However,if holding foreign exchange reserves too much or too little,the operation of the national economy will be adversely affected.During the period from 2001 when China joined the World Trade Organization to2014,its stock of foreign exchange reserve kept rising by a large margin every year.It was only 165.574 billion US dollars at the beginning of 2001 and reached as high as3,993.213 billion US dollars by the end of the second quarter of 2014,which was far higher than the current international standards.The main reasons behind this were the surplus of China's current account all the year round,the surplus in the financial account caused by strong appreciation expectation of RMB,the insufficient utilization of high foreign exchange reserves,the mandatory system of exchange,settlement and sales,the precautionary demand for foreign exchange reserves,and mercantilism.Moreover,during this period,scholars at home and abroad generally believed that the stock of China's foreign exchange reserves was higher than the moderate scale all the year round,which had brought many adverse effects to the healthy development of the Chinese economy,such as making the overprinting of basic currency impair the independence of monetary policy,enhancing the appreciation expectation of RMB and squeezing out the funds needed for upgrading the industrial structure.However,in recent years,China's foreign exchange reserve has undergone newand huge changes,and the question of how much foreign exchange reserves are moderate has once again become a hot topic.Since 2015,China's foreign exchange reserve has reversed the previous expansion trend,falling sharply for two consecutive years.At the beginning of 2017,it broke the psychological barrier of 3 trillion US dollars,with a reduction of nearly 1 trillion US dollars.On the surface,it was caused by the continued expansion of the financial account deficit due to the expected depreciation of RMB and the decline in the stock of foreign exchange reserve over the past two years due to the continued shrinkage of the current account surplus.But a closer research on this sudden decline reveals the deeper reasons that on the one hand,the changes in the international situation,including the strong interest rate-raising cycle of the United States,the rise of regional trade protectionism and the intensification of regional conflicts and on the other hand,the changes in the domestic situation,including the slowdown in economic growth,the rise of domestic demand under the adjustment of economic structure,the continuous increase in imports,and the conscious adjustment of the stock of China's foreign exchange reserve.Besides,the decline of the stock of foreign exchange reserve in the new period also reflects the stock of a country's foreign exchange reserve changes with the stage of economic development.Though the stock of China's foreign exchange reserves remained stable at around 3.1 trillion US dollars without expansion in the decline at the end of 2017 and in 2018,the worries about the insufficient stock of China's foreign exchange reserves are becoming more and more serious,because the lack of foreign exchange reserves is not only harmful to the stability and health of the Chinese economy and can also weaken China's ability to deal with international financial risks.It was widely believed that the stock of China's foreign exchange reserves has far exceeded the moderate scale which had interfered with the normal operation of the economy.However,after the sharply shrinkage in the past two years,whether the current stock of foreign exchange reserves is over the moderate scale? If less than the moderate scale,it cannot meet the normal needs of economic development,what shall be done?In addition,even if the current stock of foreign exchange reserves is still higher than the moderate scale or is in the moderate scale,will the decline in the past two yearsrepeat? How to keep the country's foreign exchange reserves in a moderate scale in the long-term?In view of the above problems,this paper firstly studies the appropriateness of China's foreign exchange reserves from different angles by using the foreign exchange reserve/import ratio method,the foreign exchange reserve/external debt ratio method and the IMF calculation model,and then uses the revised Agarwal model for empirical analysis of the moderate scale of China's foreign exchange reserves.Comparing with the stock of China's foreign exchange reserves,it is found that the results of the four methods are strikingly consistent: during the period from 2003 to2014,the expansion speed of the stock of China's foreign exchange reserve far exceeded the pace of moderate growth and holding excessive foreign exchange reserves had already interfered with the normal operation of the Chinese economy,such as greatly reducing the effects of monetary policy,adversely affecting the optimization and upgrading of industrial structure,and leading to the existence of huge opportunity costs and exchange rate risks.After 2015,the stock of China's foreign exchange reserves began to decline rapidly.By 2018,the sideways shock was around 310 million US dollars,close to the maximum size of the moderate scale,which reduced the disadvantages of holding excessive foreign exchange reserves and made the economy run more stably.Finally,although the current stock of foreign exchange reserves is basically within a moderate scale,it is achieved in a relatively passive way.In this regard,this paper holds that through Stabilizing the stock of foreign exchange reserves,stabilizing the RMB exchange rate and stabilizing the scale of external debt,the management of foreign exchange reserves can be comprehensively optimized from the aspects of security,liquidity and profitability,so as to ensure that China's foreign exchange reserve stock can be maintained in a moderate scale in the long-term and that China's economy can run more smoothly and healthily.