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Description
ABSTRACT
This paper analysises China's optimal scale of foreign reserve during 1985-2004 with single ratio and synthesis ratio. The single ratio analysis shows that China's foreign reserve to import ratio has exceeded 40% after foreign exchange rate united in 1994. The foreign reserve to money supply ratio is high as 23.8%, and will exceed 25% of international alertness in 2005. The foreign reserve to debt ratio largely exceeded 30% of international alertness. The current account balance to GDP ratio and the current account balance plus FDI to GDP ratio is out of international alertness in most years. The synthesis ratio analysis show that China's real foreign exchange reserve exceeded foreign exchange demand of debt, FDI and import during 1996-2004, and the exceeded ratio is close to 90% in 2004. This paper also discusses influence of capital flight after 1995 and international hot money after 2002 to China's optimal scale of foreign exchange.
Keywords: Foreign Reserve, Optimal Scale, Ratio Analysis
INTRODUCTION
Since the merger reform in 1994, the policy of RMB exchange has been focusing on the implementation of the dollar which is managed and floating. After Asian financial crisis in 1998, managed floating exchange rate becomes into a fixed and floating rate which is limited extremely. As we enter the 21st century, China's export-oriented economic development strategies greatly contributed to the current account surplus; The policy of foreign exchange management of "Lenient entry, stringent exit", huge market potential and advantages of cheap labor produce a large net capital inflow; plus international capital flows under the control of capital projects, which lead to a regular account surplus, capital account surplus and errors and omissions in surplus in China's balance of payments altogether, and cause sharp increase of China's foreign exchange reserve.
As a sign of national economic and financial strength, foreign exchange reserve makes up the material basis of bridging deficit of the national balance payments, maintaining the exchange rate and the stability of their own international reputation. However, foreign exchange reserve is not thinking. And the optimal foreign exchange reserve is a dynamic balance. As China's foreign exchange reserve increases significantly (shown in Figure 1), there is a strong request both theoretically and practically for the measurements of China's optimal foreign exchange reserve.
[FIGURE 1 OMITTED]
In international academic circle, there are two different viewpoints on the relation between foreign exchange reserve and microeconomic variables. According to international trade financing demand theory school which is represented by Clark(1970), Iyoha(1976), Heller & Khan(1971), Frenkel(1979) and Edwards(1984), the change of foreign exchange reserve reflects the gap between the demand of foreign exchange and real holding quantity; and it is also a dynamic course when foreign exchange reserve approaches towards the demand for foreign reserves. On the other hand, Monetary Approach of Balance of Payment Theory points out that the change of one country's foreign exchange reserve is related to its monetary supply: given the scale of credit, one country's foreign exchange reserve increases when there is an excessive demand in currency domestically; and... |
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