Foreign Exchange Reserve Scale in China

Abstract

In recent years, the dramatic increases in foreign exchange reserves of developing countries have caused a series of important financial problems. The research into the optimal range of foreign exchange reserves may provide a critical index to evaluate a country’s financial position. This study proposed a method to measure the optimal foreign exchange reserve scale in the context of potential impacts of the Covid-19 and the U.S-China trade war on the economy of China. This research also tentatively identified relationships between some financial variables and the scale of foreign exchange reserves. An improved method was taken from a scientific standpoint and deductive research was employed by collecting quantitative data. The data analysis for this paper was carried out by using correlation analysis and different types of regression analysis.

The results of this research indicated that the China’s foreign exchange reserve scale hold on to the optimal range so far. This research also aware that imported primary products have a linear relationship with the foreign exchange reserve scale, the short-term debt was significantly correlated with the foreign exchange reserve scale through comparing with other external debts, and the fluctuation of foreign exchange reserves was not affected by the transformation in foreign exchange systems. Except that, tariff changes and the trade war also have possible impacts on the foreign exchange reserve scale. Therefore, the dissertation suggested that the government should expand investments, diversified foreign exchange reserve assets, etc. Through taking these measures to ensure that foreign exchange reserves in China continue maintaining the optimal scale.