The Impact Factors Study on the Appropriate Scale of China's Foreign Exchange Reserves

Abstract

Foreign exchange reserves play a crucial role for a country in maintaining a balance of payments, enhancing international market competitiveness, and elevating its global standing. This study employs cointegration analysis to delve into the intricate relationship between the Chinese yuan to U.S. dollar exchange rate, external debt balance, total imports, and the scale of China's foreign exchange reserves. The findings reveal that among the factors considered, total imports exert the most significant influence on the scale of China's foreign exchange reserves. In the short term, a negative correlation is observed between foreign exchange reserves and the yuan to U.S. dollar exchange rate. However, in the long term, a positive correlation emerges between foreign exchange reserves and both the yuan to U.S. dollar exchange rate and total imports. Intriguingly, a negative correlation is noted with the external debt balance over the long term. This nuanced analysis sheds light on the dynamic interplay between key economic variables, providing valuable insights for policymakers, economists, and stakeholders. By uncovering the intricate relationships and time-dependent correlations, the study contributes to a deeper understanding of the factors influencing the scale of China's foreign exchange reserves, offering a foundation for informed decision-making in the realm of international finance and trade.