American International Journal of Humanities and Social Science (AIJHSS)

Foreign exchange reserves are important indicators of ability to repay foreign debt and for currency defense. This paper adopts annual time series from 1983 to 2016 to analyze the impact of trade balance, foreign direct investment, external debt and foreign exchange rate on the holdings of foreign exchange reserve. Taking the special situation of China into consideration, the analysis is divided into three periods. The empirical analysis results show that the factors that impact the holdings of foreign exchange reserve are different in different period. More specifically, in the first period, the factors that affect the holdings of foreign exchange reserve most are the foreign direct investment and the trade balance. In the second period, the factors that affect the holdings of foreign exchange reserve most are the foreign direct investment and the external debt. In the third period, the factors that affect the holdings of foreign exchange reserve most are trade balance and exchange rate. On the basis of empirical analysis, some measures should be taken so as to keep a good holdings of foreign exchange reserve in China.