What is foreign exchange reserve? Foreign exchange reserve, also known as foreign exchange reserve, refers to the foreign exchange part of the international reserve assets held by a country's government, that is, the claims expressed in foreign currencies held by a country's government.

It is an asset held by a country's monetary authority and can be exchanged for foreign currency at any time.

In a narrow sense, foreign exchange reserves refer to a country's foreign exchange accumulation; in a broad sense, foreign exchange reserves refer to assets denominated in foreign exchange, including cash, gold, foreign securities, etc.

Foreign exchange reserves are an important part of a country's international solvency and have an important impact on balancing the international balance of payments and stabilizing the exchange rate.

The specific form of foreign exchange reserves is: the government's short-term deposits abroad or other means of payment that can be cashed abroad, such as foreign securities, foreign bank checks, promissory notes, foreign currency bills, etc.

It is mainly used to clear the balance of payments deficit and intervene in the foreign exchange market to maintain the exchange rate of the domestic currency.

The Development of Foreign Exchange Reserves In order to meet the needs of international payments, the foreign exchange central banks and other government agencies of various countries centrally control are foreign exchange reserves.

Together with gold reserves, Special Drawing Rights and funds readily available in the International Monetary Fund, they constitute a country's total official reserves (reserve assets).

The main purpose of foreign exchange reserves is to pay off the balance of payments deficit and are often used to intervene in the foreign exchange market to maintain the exchange rate of the domestic currency.

The main forms of foreign exchange reserves include the government's short-term deposits abroad, and other means of payment that can be cashed abroad, such as foreign securities, foreign bank checks, promissory notes, foreign currency bills, etc.

For a long time after the Second World War, the main currency of Western countries' foreign exchange reserves was the US dollar, followed by the pound. After the 1970s, the German mark, Japanese yen, Swiss franc, French franc, etc. were added.

Among the total international reserve assets, the proportion of foreign exchange reserves continues to increase.

The amount of foreign exchange reserves reflects a country's ability to cope with its international balance of payments to a certain extent and is related to the maintenance and stability of the country's currency exchange rate.

It is an important indicator showing the strength of a country's economy, currency and international balance of payments.

Functions of Foreign Exchange Reserves The functions of foreign exchange reserves mainly include the following four aspects: First, to regulate the balance of international payments and ensure external payments.

The second is to intervene in the foreign exchange market to stabilize the local currency exchange rate.

The third is to maintain international credibility and improve external financing capabilities.

The fourth is to enhance comprehensive national strength and the ability to resist risks.

A certain amount of foreign exchange reserves is an important means for a country to adjust its economy and achieve internal and external balance.

When there is a deficit in the balance of payments, using foreign exchange reserves can promote the balance of the balance of payments; when the domestic macroeconomic imbalance occurs and total demand is greater than total supply, foreign exchange can be used to organize imports, thereby adjusting the relationship between total supply and total demand.

Promote macroeconomic balance.

At the same time, when the exchange rate fluctuates, foreign exchange reserves can be used to intervene in the exchange rate to stabilize it.

Therefore, foreign exchange reserves are an indispensable means to achieve economic balance and stability, especially as economic globalization continues to develop and a country's economy is more susceptible to the economic impact of other countries.

Generally speaking, the increase in foreign exchange reserves can not only enhance the ability of macroeconomic control, but also help maintain the international reputation of the country and enterprises, help expand international trade, attract foreign investment, reduce the financing costs of domestic enterprises, and prevent and resolve international conflicts.

Financial risk.

The appropriate level of foreign exchange reserves depends on a variety of factors, such as import and export conditions, the scale of foreign debt, and the actual use of foreign capital.

Foreign exchange reserves should be maintained at an appropriate level based on the comparison of benefits and costs of holding foreign exchange reserves and the conditions in these aspects.

The Price of Foreign Exchange Reserves As a symbol of a country's economic and financial strength, foreign exchange reserves are the material basis for making up for the country's international balance of payments deficit, stabilizing the country's exchange rate, and maintaining the country's international reputation.

For developing countries, it is often necessary to hold higher than conventional levels of foreign exchange reserves.

However, the more foreign exchange reserves, the better. In recent years, the rapid expansion of my country's foreign exchange reserves has had many negative impacts on economic development.

1. Damage the potential for economic growth.

The inflow of foreign exchange reserves of a certain scale represents the outflow of physical resources of a corresponding scale. This situation is not conducive to the growth of a country's economy.

If the extraordinary growth of my country's foreign exchange reserves continues, it will damage my country's economic growth potential.

2. It has brought about large interest spread losses.

According to conservative estimates, based on the 2% difference between the investment profit rate and the foreign exchange reserve rate of return, if you have foreign exchange reserves of 600 billion US dollars, the annual loss will be as high as more than 10 billion US dollars.

This potential loss will be even greater if the risk of exchange rate changes is taken into account.

In addition, the vast majority of foreign exchange reserves in many countries are U.S. dollar assets. If the U.S. dollar depreciates, the country's reserve assets will also shrink severely.

3. There is a high opportunity cost loss.

Our country introduces approximately US$50 billion in foreign investment every year, for which the country must provide a large number of tax incentives; at the same time, our country holds approximately US$600 billion in foreign exchange reserves, which are unused.

In this way, on the one hand, the national fiscal revenue will be reduced; on the other hand, the people will be frugal and lend money to foreigners to spend. The potential opportunity cost cannot be ignored.