Journal of Applied Finance & Banking

Study on Chinese foreign exchange reserves

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  • Abstract

    In this paper we attempt to determine whether the Chinese foreign exchange reserves have been too large. We empirically analyzed the foreign exchange reserves first by using the rate analysis method and then using the cost-profit method. Using the rate analysis method we found that the Chinese actual foreign exchange reserves greatly exceeded the 3-month import foreign exchange demands and also that the optimal foreign exchange reserves demands were calculated to be 40% of the total foreign debt balance. Every year the Chinese foreign exchange reserves have exceeded the total amount of import foreign exchange demand as well as exceeding the foreign exchange demands for the foreign debt balance and profit returning foreign exchange demands of foreign investment enterprises. In addition we have found that only from 2000 to 2003 did the Chinese actual foreign exchange reserves exceed the optimal foreign exchange reserves calculated using the Heller model [11] from 1966. In other years they have basically been equal to or less than the optimal value for foreign exchange reserves, which indicates that there are limits to the Heller model.