The Influential Factors of China's Foreign Exchange Reserves

The growth of foreign exchange reserves has been the focus of much recent research. Studies have examined the influential factors of foreign exchange reserves in a range of different settings and contexts. However, most of the existing research has focused on the international balance of payments, despite the fact that there is general agreement that international balance of payments plays an important role in the growth of foreign exchange reserves. In the current study, we explore the effect of balance of domestic economy on China's foreign exchange reserves through empirical analysis. Through the data from 1978 to 2007 in China, we find that the gap between savings and investment has a positive impact on China's foreign exchange reserves. This result explains that the continued growth of foreign exchange reserves not only reflects the imbalance of a country's external economy, but also reflects the imbalance of domestic economy. In addition, we find that economic scale, dependence on foreign trade and exchange rate can affect China's foreign exchange reserves.