A Study on the Diversified Management of China’s Foreign Exchange Reserve
|Keywords||Foreign Exchange Reserves Diversified Management Appropriate Scale Optimal Structure Investment Management|
As an important part of a country’s macroeconomic management, foreignexchange reserve management is not only closely related to the country’s monetaryand financial policies, but its policy objective is also to serve the needs of thecountry’s overall economic development strategy, which lies in the level ofaccumulation of foreign currency reserve assets, the currency structure and direction,optimized allocation that is conducive to productivity, moderate economic growth andthe balance of international payments. It is based on the above policy objectives thatwhen determining the level and composition of foreign reserves, authorities shouldconsider the risk-benefit ratio, as well as the liquidity of the reserves, the purchasingpower of reserves, reserves and import cover, intervention in foreign exchange marketneeds and many other factors, so as to achieve a best combination of safety, liquidityand profitability.The current stage of China’s foreign exchange reserves management uses avertical management system–the People’s Bank of China authorized the StateAdministration of Foreign Exchange reserves to conduct operation and management.The composition of China’s foreign exchange reserves is not publicly disclosed, butwhat is generally agreed is that among the current foreign exchange reserves, morethan half of the reserve assets are government bonds and agency bonds in US dollars.China’s foreign exchange reserves continue to expand, facing external pressure toappreciate the RMB exchange rate. Besides, the false use of foreign investment, theirregular settlement of foreign exchange capital, banks breakthrough short-termexternal debt indicators into the capital and other non-legitimate channels andoperations into the "hot money" also posed new challenges to China’s foreignexchange reserves management.To address these challenges, China is in urgent need to implement effectivemanagement of foreign exchange reserves–Its goal is to achieve diversification offoreign exchange reserves management."Diversified" management does not mean asimple expansion of size and structure of the traditional management of foreign exchange reserves, but a new interpretation of how foreign exchange reserve shouldbe managed: to meet the external solvency and preventive reserve requirements as aprecondition, flexible and risk-controlled portfolio management should be adopted.The settlement of a moderate scale for foreign exchange reserves and the choice of thereserve structure lay a foundation for using foreign exchange reserves to doinvestment. And investment of foreign exchange reserves will in turn facilitate theadjustment of the reserve capacity to the appropriate scale and the achievement of theoptimal reserve structure.This dissertation combines Frenkel model, Heller-Knight model, Dooley modelas well as several other models, together with the ratio analysis and measurement ofregression methods, to study the appropriate scale of China’s foreign exchangereserves and the optimal structure; to assess the investment performance of foreignexchange reserves by case studies; to explore China’s foreign exchange reservesmanagement framework and specific implementation path based on experiences andinspirations from the major developed economies, emerging and developingeconomies in foreign exchange reserves management; to systematically streamline thehistory of China’s foreign exchange reserves management since the founding of newChina and point out the major issues and challenges currently faced by themanagement departments; and to provide useful policy recommendations forreforming and improving the management system for China’s foreign exchangereserves.This dissertation comes to the following conclusions:(1) after1994, the actualsize of China’s foreign exchange reserves has deviated from the scope of a moderatescale, and this deviation gradually expanded after2001. Held reserves caused by thetrade balance, with investments and interventions demand excluded, cannot fullyexplain the gap between China’s actual reserves and the optimal size. Thus Chinaindeed faces excess in reserves;(2) after2000, in terms of positions in China’s foreignexchange reserves, the U.S. dollar as the core reserve currency has maintained arelatively stable state; the euro’s weight has been strengthened, whereas that of theJapanese yen declined. The estimate based on China’s trade structure shows that the optimal structure of foreign exchange reserves is where the dollar accounts for60%,euro for20%, Japanese yen for10%and other for10%; the estimate based on China’debt structure shows that the optimal structure of foreign exchange reserves is wherethe dollar accounts for75%, the euro for10%, yen for10%, and other for5%;(3)China should reform the current foreign exchange management system, and establisha “diversified” management structure, in order to achieve "diversification" of thereserve management.