ABSTRACT

At the end of 2013, China held a huge stock of international reserves in the amount of US$ 3821.3 billion foreign exchange reserves, which is far more enough to prevent financial risks. Most research about China’s foreign exchange reserves are basically admitting that international capital could flow in and out of China with few restrictions. However, the capital controls are not under consideration, which probably cause miscalculation on the optimal quantity and the opportunity cost of foreign exchange reserves. Therefore, this paper will show the significance theoretically and practically by integrating capital controls and other variables to re-estimate the foreign exchange reverses demand model.