Formation of foreign exchange reserves: China's large foreign exchange reserves come from two ways: trade and capital. When there is a large trade surplus and net capital inflow, foreign exchange reserves are generated.

Exchange rate determination: the exchange rate is the relative price of the two countries' currencies, which is determined by the relationship between supply and demand in the foreign exchange market. Popular exchange rate theories, such as exchange rate parity and purchasing power parity theory.

Relationship: 1) A country produces a large amount of foreign exchange reserves, which means that a large amount of foreign exchange flows into the central bank, and at the same time, the central bank issues the corresponding domestic currency according to the timely exchange rate. There will be a large demand for local currency in the market (because participants expect to need local currency for settlement in the future), which will lead to the pressure of local currency appreciation. 2) In addition, a large amount of foreign exchange reserves means that a large amount of local currency issuance flows into the market, so there may be excess liquidity in the market (which is also a problem in China now). The main way to recover liquidity is to raise interest rates, which eventually leads to the appreciation of the local currency. Because if the domestic interest rate rises and exceeds the overseas foreign currency interest rate, the profit-seeking nature of capital will lead to overseas foreign exchange inflows to obtain high interest rates. In this way, the market demand for local currency leads to the pressure of local currency appreciation.