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Optimize the Structure of Chinese Foreign Exchange Reserve Currency

Author: WangGuiHua
Tutor: ZuoChengYu
School: Dongbei University of Finance
Course: International Trade
Keywords: foreign exchange reserves currency structure foreign trade structure
CLC: F832.6
Type: Master's thesis
Year: 2013
Downloads: 5
Quote: 0
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Abstract


Foreign exchange reserves are those that are held by a country’s monetary authorities and are able to fully converted in the international market. It is the most important part of international reserves; it is a reflection of a country’s economic strength. A country with foreign exchange reserves mainly wants to adjust balance of payments, foreign payment, maintain exchange rate stability, etc. Therefore, foreign exchange reserve is an important means of one country adjust foreign economic and trade activities. Today, China is the country with the biggest scale foreign exchange reserves in the world. When huge foreign exchange reserves maintain its basic function, it also brings to our country a lot of problems. In front of the huge foreign exchange reserves, how to solve the appearing problems, the management of foreign exchange reserve currency structure has become an important choice.Through the analysis, we find that the current growth of the global foreign exchange reserves is rapid and has formed diverse foreign exchange reserve structure dominated by the dollar, the euro, the yen and the pound. From the current global reserve system, there are about more than160countries and regions in the world which currencies are directly contact with us dollar. Chinese foreign exchange reserve structure rooted from the structure of the global reserve currency, and as the most of the developing countries, China heavily relies on certain kinds of reserve currency. However, due to the uniqueness of China’s economic development, China’s foreign exchange reserve currency structure had its own unique problems. For example, China’s foreign exchange reserve has been facing the stable currency structure and narrow ways for government bonds. We need comprehensive consideration of various factors, dynamic view, and multiple methods to solve these problems.The research of foreign exchange reserve structure includes two aspects:one is the choice of foreign exchange reserve currency; the second is the proportion of foreign exchange reserve currency. For the choice of foreign exchange reserve currency, generally we should follow the principle of economic strength, the match with the trade, and the stable of currency’s value. For the proportion of foreign exchange reserve currency structure, generally we should follow the principle of safety, liquidity and profitability. And, the reserve currency share is relatively complicated. For China, as the foreign exchange reserve currency is expectable, the structure of foreign exchange reserve currency management should emphasize on foreign exchange reserve currency share management, and decide the proper proportion of the major reserve currency.For the research of foreign exchange reserve currency structure, western scholars start earlier. The most often cited models are portfolio model, Heller Knight model and Dooley model; they laid the foundation for people to study foreign exchange reserve currency structure. Portfolio model emphasized on considering the risks and benefits of currency structure arrangement, Heller-Knight model focused on the discussion the role of one country foreign trade structure to the currency structure, while Dooley model focused on study a country’s foreign debt structure, and the country’s exchange rate system arrangement affecting the country’s share of reserve currency. These three models offer us with the direction of study foreign exchange reserve currency structure, however, to some degree; we cannot ignore these three models’ defects. Many domestic scholars depend on these three models; choose some factors which influence the foreign exchange reserve currency structure arrangement for study. This article first described the specific content of these three models in detail, and then combined with the concrete situation in our country, put forward six aspects to analysis the distribution of the proportion of foreign exchange reserve currency structure. They respectively are:foreign trade structure, debt structure, source of foreign direct investment, exchange rate system arrangement, the role of reserve currency in the international monetary system, yields, etc.After analysis the selected factors that influence the structure of the foreign exchange reserve currency, we think that a country’s foreign exchange reserve currencies share is affected by multiple comprehensive factors, and these factors will change with time and the economic situation. Today, the economic situation is not clear, the world economy downside risks remaining, the structure of foreign exchange reserve currency should firstly consider the safety factor. For China’s foreign exchange reserve currency arrangement problems, we can mainly from the following several aspects to solve them. First, you should adjust the US dollar proportion of China’s foreign exchange reserves, and make it consistent with actual economic situation and economic prospects, avoid drastically shrinking reserves; considering the rising status in international monetary system of euro and the relations with our economic and trade, it is necessary to increasing euro’s share of China’s foreign exchange reserves. Secondly, China should adopt progressive approach to adjust the structure of foreign exchange reserves, avoid economic instability problems because of massive foreign exchange reserves currency structure adjustment. Thirdly, we should consider safety factor with foreign exchange reserve currency structure management, and strengthen risk management. Finally, China should stick to push RMB internationalization path, it is a long-term strategy for the realization of China’s foreign exchange reserve currency structure optimization management.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Exchange rate,foreign financial relations
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