What does foreign exchange reserves mean?

The so-called foreign exchange reserves are actually a kind of currency assets, which can be paid or flowed in the market. To put it bluntly, the foreign exchange owned by the country is foreign exchange reserves, so what is the purpose of these currencies?

foreign exchange reserves

Specifically, countries can use these currencies to intervene in the exchange rate market. When their currencies appreciate, they can increase foreign exchange reserves to maintain the balance of the exchange rate market; on the contrary, when their currencies depreciate, they can maintain the balance of exchange reserves by reducing foreign exchange reserves. The balance of the exchange rate market; in addition, foreign exchange reserves can also balance the international balance of payments between countries, and can also conduct international trade transactions.

What are the functions of foreign exchange reserves?

  1. The role of foreign exchange reserves is that certain foreign exchange reserves are an important means for a country to carry out economic adjustments and achieve internal and external balance. When there is a deficit in the balance of payments, foreign exchange can be used to organize imports to adjust the relationship between total supply and total demand.
    The role of foreign exchange reserves
  2. 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 equilibrium and stability, especially in the continuous development of economic globalization, and the economy of one country is more susceptible to the economic influence of other countries.
  3. The principle of foreign exchange reserves is summarized. The security mentioned here is not only the prevention of currency exchange rate and interest rate risks, but more importantly, the prevention of realization, circulation and exchange risks. Therefore, in order to reduce the risk of reserve assets, when considering external payments, a proactive approach should be taken to manage and operate reserves as financial assets.

What is the relationship between foreign exchange reserves and foreign exchange transactions?

With foreign exchange reserves, many transactions become simple, and the economic strength of a country can also be highlighted through foreign exchange reserves. However, the more foreign exchange reserves, the more it is necessary to treat the existence of foreign exchange reserves dialectically.

In addition, there is a very close relationship between foreign exchange reserves and exchange rate market balance. According to the specific conditions of the exchange rate market, foreign exchange reserves need to be adjusted. We know the meaning of foreign exchange reserves. If we learn to look at foreign exchange reserves, we can better analyze changes in the exchange rate market in order to better plan our investments.

The specific forms of foreign exchange reserves are: such as foreign securities, foreign bank checks, promissory notes, foreign currency drafts, etc., short-term foreign government deposits or other means of payment that can be cashed abroad. Mainly used to intervene in the foreign exchange market, settle the balance of payments deficit, and maintain the exchange rate of the domestic currency.

  1. Maintain currency diversification of foreign exchange reserves and diversify the risk of exchange rate changes;
  2. According to the needs of imported goods, services and other payment, determine the amount of various currencies in the reserve, the proportion of various currency assets and the term structure;
  3. When determining the form of stocking currency assets, not only liquidity, flexibility and security must be considered, but also the rate of return of reserve assets;
  4. Pay close attention to changes in the exchange rate of stock currencies, and adjust the proportion of reserve assets in time or irregularly for different currencies.
    Foreign exchange reserve management

Three principles of foreign exchange reserve management

When managing and operating foreign exchange reserves, governments generally follow the three major principles of safety, liquidity, and profitability.
Three principles of foreign exchange reserve management

  1. Security

This means that foreign exchange reserves should be deposited in politically stable, economically strong, and reputable countries and banks, and always pay attention to the political and business trends of these countries and banks. We need to choose currencies with low risk and relatively stable currency, pay close attention to the balance of payments and economic conditions of these currency issuing countries, predict exchange rate trends, adjust currency structure in time, and reduce exchange rate and interest rate risks; we should also invest in safer credit instruments , Such as high-reputation national bonds or institutional bonds guaranteed by the state.

  1. Liquidity

Refers to the guarantee that foreign exchange reserves can be cashed for payment at any time and realized at the lowest cost. When arranging foreign exchange assets, countries should reasonably arrange investment maturity portfolios based on their own forecasts of foreign exchange receipts and payments within a certain period of time, and consider responding to emergencies. Cash and Treasury bills are highly liquid, followed by long-term government bonds and medium-term Treasury bills.

  1. Profitability

On the premise of ensuring safety and liquidity, through the analysis and prediction of market trends, we can seize market opportunities, determine a scientific investment portfolio, conduct asset investments and transactions, and increase the value of reserve assets.

However, security, liquidity and profitability cannot be achieved at the same time. Generally speaking, high risk can bring high returns. Assets with large profits must have poor security, and assets with strong security and liquidity must have low profits. Therefore, countries often have their own focus when managing foreign exchange reserves. In general, we must consider these three principles as much as possible, adopt investment portfolio strategies, reduce risks, implement diversified management of foreign exchange reserves, and achieve appreciation.