An Empirical Analysis about Optimal Scale of China’s Foreign Exchange Reserves

Tingting Cheng,Jiajie Zhu

doi:10.4236/jssm.2020.132024

Abstract

Foreign exchange reserves are of vital importance of in the area of international finance research. It is related to a country’s ability to stabilize the currency exchange rate and balance of payments adjustment. Foreign exchange reserves are an important indicator to examine a country’s foreign economic relations. Exploring the optimal scale of China’s foreign exchange reserves is an important topic of academic research. This thesis firstly explores the optimal scale of China’s foreign exchange reserves by using the improved Agarwal model. The result shows that the China’s foreign exchange reserves are in the optimal interval in 2016. After that, the writer employs some tests to determine some variables that may have effects on the foreign exchange reserves. The test results show that the export, import, GDP, and the foreign direct investment (FDI) have co-integration with the foreign exchange reserves. And therefore these factors have the long term effects on the level of foreign exchange reserves.

Highlights

From 2001, there is a rapid growth of foreign exchange reserves in China
The writer will choose some economic variables that may affect the scale of forex reserves, such as the imports (IM), exports (EX), the external debt (DEB), foreign direct investment (FDI) and gross domestic product (GDP)
Co-Integration Equations The results of Johansen test shows that the variables that have a long term relationship with the forex reserves are the export, import, foreign direct investment and the gross domestic product (GDP)

Summary

Introduction

From 2001, there is a rapid growth of foreign exchange reserves in China. And after February 2006, the scale of foreign exchange reserves in China exceeds that of Japan. These drawbacks may affect the healthy growth of economy. They believe that the scale of China’s foreign exchange reserves is still in the optimal scale. The writer will explore the fact about the scale of foreign exchange reserves. The writer explores the variables that can affect the scale of China’s foreign exchange reserves. According to the fact the writer finds, China’s government can take some measures on these variables in order to keep the scale of foreign exchange reserves in the optimal range

Literature Review

Summary of Literature Review

Definition of Foreign Exchange Reserves

The Introduction of Agarwal Model

The Modified Agarwal Model

Result Analysis about Optimality of China’s Forex Reserves

Analysis on Factors Affecting Forex Reserves Scale

The Factors Considered

Data Selection

Unit Root Test

Co-Integration Test

Granger Causality Test