中国的外汇储备如何管理How to Manage China’s Foreign Exchange.doc

毕业论文外文文献翻译院 系：厦门理工学院商学系年级专业：08财务管理2班姓 名：林芬学 号：0801032242附 件：How to Manage Chinas Foreign Exchange Reserves?指导老师评语： 指导教师签名：12年 3 月 8 日How to Manage Chinas Foreign Exchange Reserves?Author: Ke LiuAdvisor: Erik Strojer Madsen Aarhus School of BusinessMSc in Finance and International BusinessNovember 2007AbstractFinancial crisis is not a new term to the world and has been through the financial globalization in the past decades. Many developing countries choose to stockpile a large amount of foreign exchange reserves to protect their economy from external shocks. However, given the declining value of the US dollar, the rapid built-up of reserves also creates a new debate on what amount and which form to hold for emerging economies. This paper attempts to address the two questions for China, the largest reserve holder since 2006. By performing an empirical analysis of 42 developing countries, a series of conclusions are drawn, including a major confirmation that Chinas holding of reserves exceeds the estimated adequate level. With a combination of telling evidence and theoretical interpretation, this paper provides a package of solutions to the issue of how to manage Chinas foreign exchange reserves in the long-term and short-term scenarios. To fundamentally slowdown the growth rate of reserves and reduce the aggregate amount, a shift in economic policies is desired. Meanwhile, taking into account the opportunity cost of holding, a course of proactive reserve management would be advisable. Keywords： foreign exchange, reserves, China, reserve managementPart I IntroductionForeign exchange reserves, also refer to international reserves, are indispensable financial resources of an economic entity. To every open economic region, the amount of reserves held by monetary authority varies dramatically based on an array of vested policies and objectives. The International Monetary Fund (IMF)identified an economys international reserves as “those external assets that are readily available to and controlled by monetary authorities for direct financing of payments imbalances through intervention in exchange markets to affect the currency exchange, and/or for other purposes. ” The commonly used form consists of convertible foreign exchange held by monetary authorities in the form of currency, deposits, securities or financial derivatives, monetary gold, special drawing rights (SDRs), and unconditional drawing rights with the IMF.Individual countries, especially those who have a large volume of international trade, experience a high risk of random shocks to their external balances, resulting from temporary or continuous sudden drops of their foreign exchange earnings. Therefore, international reserves serve to absorb such undesired crises through financing the payment deficits, which in turn avoid the costs of macroeconomic adjustment . In addition, foreign exchange reserves can be used to serve external debt or act as the collateral for international borrowing. For those economic entities who undertake a fixed exchange rate policy, international reserves also play an important role in backing up their currencies and enhancing the countries credibility.As the international trade flow increases and global financial integration evolves, the demand for international reserves has grown as well. In 1990, the world aggregate holding of reserves amounts to $919 billion and Chinas share merely equals 3.3 percent at that time. Sixteen years later, however, the worlds total holding grows up to $5,038 billion, more than one fifth of which is contributed by China.Figure 1: Chinas recent built-up of reservesDuring the past decade, China has accumulated a huge lump sum of foreign exchange reserves due to its prominent economic development. In late February 2006, China surpassed Japan to become the worlds largest holder of foreign exchange reserves, and at the end of March 2007, this number reaches 1.2 trillion U.S. dollars. The reserve to GDP ratio is approximately 40 percent at the end of 2006, while the world average level was around 10 percent. One view is that reserves have been accumulated as insurance against the risk of balance of payments crises, which came to be perceived as higher after the 1997-98 Southeast Asian crisis.Although the strongly export-oriented economic development accounts for part of the upward trend, FDI inflows have been assumed to be responsible for a big portion of the reserves. Despite of capital controls, evidence also indicates that speculative capital flows into this country through various channels, betting on the appreciation of RMB.As a large transitional economy, China is in a stage of rapid economic development and restructuring. Large foreign exchange reserves help to maintain the credibility of both the country and its currency, to expand international trade, to attract overseas investment, to lower the cost of financing its institutions in their efforts to enter the international market, to enhance overseas financing capacity and to uphold steady growth as the country develops.However, some economists argue that the recent heavy foreign exchange accumulation, including rapidly increased speculative capital flows, has augmented risks to the countrys financial system, exacerbated inflationary pressure, created huge opportunity costs that resulted in large wealth losses with the weakening dollar, intensified pressure for the RMB appreciation and finally increased the complexity of macroeconomic adjustment and foreign exchange reserve management.The recent large increase in international reserves has generated a debate on the optimal level of reserves for emerging countries. However, quantitative literature on reserves has lagged somewhat behind the policy questions raised by the international financial crisis of the 1990s. The heyday of the reserve adequacy study dates back to the 1960s and the 1970s with a major pitfall of difficulties in quantifying determinants. Policy makers have often used rules of thumb, such as maintaining reserves equivalent to quarterly imports or the “Greenspan-Guidotti rule” of full coverage of total short-term external debt. But this is not the case for Far East countries with more financial assets and liabilities under financial globalization.Dooley and others (2004) assert that reserves buildup in Asia is the unintended consequence of policies that maintain large current account surpluses. Li (2006) refutes that Chinas foreign exchange reserves are not excessive because it needs sufficient reserves to maintain the stability of its currency and to maintain the confidence of international investors. He also argues that Chinas foreign exchange reserves have been rewarded by sufficient returns. Frankel (2004) emphasizes the opportunity cost of huge foreign exchange reserves and concludes that China has been presumably paying foreign investors on their inward investment a higher return than the earning made from its foreign exchange reserves. Xia (2006) estimates that $700 billion in foreign exchange reserves should be sufficient.Therefore, the issue about what is the optimal size, or in other term, the adequate level of Chinas foreign exchange reserves needs to be addressed. Currently, most relevant research either focuses on general discussions of determinants of the demand for foreign exchange reserves or empirically analyzes countries holding compositions. However, little work pays attention to a thorough analysis of foreign exchange reserves management with a Chinese feature. Furthermore, as the US dollar is expected to depreciate in the long-run due to its large current account deficit, both evidence and theories suggest a diversification of foreign exchange reserves away from a single US dollar structure. Hence, how to allocate Chinas foreign assets is the second question to be answered.This paper examines the claim that the foreign exchange reserves of China are not only sufficient but also exceed its demand for liquidity and other major economic considerations. With this confirmation, the latter phase centers on how to adjust the current level to the adequate level estimated.Part II Literature ReviewMost quantitative literature on international reserve holdings is based on theories developed in the 1960s, when the world adhered to the Bretton Woods System and the global capital flows were relatively small. The framework of analysis on reserve adequacy and optimality could be classified by the methodologies used into two categorizes: ratios as tools of analysis and regression analysis. The following gives a chronological retrospect of previous study.2.1 Ratio AnalysisReserve to import ratioThe most widely used ratio method was the ratio of reserve to import first generalized by Triffin (1947, 1960). It is argued that the demand for reserves should move in line with the trend in international trade since receipts and payments were observed to be volatile. He concludes that major countries should maintain a constant reserve to import ratio ranging from 20 percent as a minimum to 40 percent maximally. However, this method was born with almost equal number of critics and advocators. Machlup (1966) discredits the theoretical basis for the assumed rigid reserve-import ratio as it lacks of evidence and theory on why such ratio should remain constant across countries or through time. As his defense, three other ratios, including reserve to largest annual reserve losses, reserve to domestic money and quasi money, reserve to liabilities of central banks, were used to explain the behaviors of 14 industrial countries from 1949 to 1965. He stated that “on purely economic grounds, reserves are held only for the purpose of being eventually used.” However, this ex parte assumption also neglects a precautionary nature of reserves, especially under fixed exchange rate regime. Similarly, Olivera (1969) theoretically argues that precautionary demand for reserves should reflect variance of changes in annual imports, implying that a constant reserve-import ratio leads to a significant overestimation of present and future demands.The IMF started to measure the adequacy of reserves in the 1950s by the ratio of reserve to import. European Central Bank (2006) regards four months import coverage as the “rule of thumb”. Since the major function of foreign exchange reserves is protecting a country from the uncertainty of international trade, the ratio of reserve to import has almost been included in all analysis on this subject.Reserve to domestic money supplyBecause enough stockpiles of international reserves would substantially improve the credibility of a countrys currency, the ratio of reserve to domestic money indicates the potential of capital flight from domestic currency. Machlup (1966) was the first one who managed to use this ratio, although he finally obtained a contradictory conclusion that the demand for reserves is independent of any identifiable variable. The procedure of the functioning of reserve holding is nevertheless sound while ratios act unstable through time. This evidence is proved by Frenkel (1971), who performed a regression equation on 55 countries, and the coefficient of domestic money supply was statistically significant, especially for less developed countries.Furthermore, Frenkel and Johnson (1976) expatiate that international reserves will increase if the demand for money exceed supply and vice versa. In that sense, international reserves are a residual. Based on this view, Frenkel (1978) suggests combine the demand for international reserves theory and the monetary approach to the balance of payments, followed by an attempted analysis by Lau (1980). Interestingly, Edwards (1984) empirically explores the relationship between reserve flows and domestic credit creation by using 23 fixed exchange rate developing countries and concludes that domestic credit cannot be considered completely exogenous but partial evidence.Reserve to short-term debt ratioBrown (1964) gives an analysis of the reserve to net external balance ratio on the ground that reserves function as a cushion against future balance of payments deficits. It is assumed that this ratio reflects an economys financial ability to serve its existing short-term external debts , especially in times of a sudden stop in short-term external debt flows. Greenspan and Guidotti (1990) suggest that developing countries, with limited access to international capital market, should at least cover all their short-term debts.Opportunity Cost of CapitalThe opportunity cost of holding international reserves plays a central role in models of optimal demand for foreign exchange reserves. Heller (1966) first introduces a cost-benefit perspective to solve the issue of adequacy of international reserves by means of econometric analysis. The theoretical definition of cost refers to the opportunity cost of holding reserves and the benefit derives from the avoidance of macro-adjustments for external deficits.The opportunity cost of holdings, practically proxied by government bond yield , the domestic discount rate , or the yield on domestic securities , reduces a countrys national income which can be used for domestic consumption and investment. Therefore, it is expected to be negatively related to reserve demand. However, these farfetched proxies have failed to indicate a significant cost effect since none of them is accurately consistent with the theoretical definition. In addition, because foreign exchange reserves are to be invested abroad, domestic discount rate or yield on domestic securities are unsatisfactory in explaining the cost-benefit criteria. Nominal rate of return does not represent the real return because inflation varies dramatically, especially in developing countries. Macroeconomic adjustments, such as contractionary fiscal/monetary policy and exchange rate depreciation, result in costs in terms of aggregate income and welfare loss. Therefore, reserves serve as an alternative to absorb the balance of payments shocks facing the authorities. The reserve-yielded returns, though comparatively small due to policies and restrictions, are more often than not ignored in empirical studies.Hellers model can be used to analyze the effects of adjustment to an external disequilibrium in a precise way. However, the model is far from perfect once it deals with the realistic world. First of all, evidence shows that the