An Empirical Assessment on China’s Optimal Foreign Exchange Reserve: 1985-2004

Desheng Chen
Tsinghua University, China
Chunqing Li
Tsinghua University, China
Xianjie Xu
Tsinghua University, China
Jiasu Lei
Tsinghua University, China

ABSTRACT 

This paper analyzes 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