Foreign exchange reserves refer to convertible foreign currencies held by a country's monetary authorities that can be used for external payment. Not all national currencies can be used as international reserve assets. Only those currencies that occupy an important position in the international monetary system and can be freely converted into other reserve assets can be used as international reserve assets. China and other countries in the world often use foreign exchange reserves in foreign trade and international settlement, mainly including US dollars, euros, Japanese yen, British pounds and so on.

A certain foreign exchange reserve is an important means for a country to adjust its economy and achieve internal and external balance. When the balance of payments is in deficit, the use of foreign exchange reserves can promote the balance of payments; When the domestic macro-economy is unbalanced and the total demand exceeds the total supply, foreign exchange can be used to organize imports, thus adjusting the relationship between total supply and total demand and promoting 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 the exchange rate. Therefore, foreign exchange reserves are an indispensable means to achieve economic balance and stability, especially when economic globalization is developing and one country's economy is more susceptible to the influence of other countries' economies. Generally speaking, increasing foreign exchange reserves can not only enhance macro-control ability, but also help to maintain the international reputation of countries and enterprises, expand international trade, attract foreign investment, reduce the financing cost of domestic enterprises, and prevent and resolve international financial risks. Of course, this does not mean that the more foreign exchange reserves, the better, because holding foreign exchange reserves has a price.

First, foreign exchange reserves are characterized by holding a financial creditor's right expressed in foreign currency, rather than putting it into domestic production and use. This leads to the problem of opportunity cost, that is, if the monetary authorities do not hold reserves, they can use these reserve assets to import goods and services and increase the actual resources for production, thus increasing employment and national income, while holding reserves will give up this interest. Therefore, holding foreign exchange reserves should consider the opportunity cost.

Second, the increase in foreign exchange reserves should correspondingly expand the money supply. If there are too many foreign exchange reserves, it will increase the pressure of inflation and increase the difficulty of monetary policy. In addition, holding too much foreign exchange reserves may also suffer losses due to the depreciation of foreign exchange rates. Therefore, foreign exchange reserves should be maintained at a moderate level. The appropriate level of foreign exchange reserves depends on many factors, such as import and export, the scale of foreign debt, and the actual utilization of foreign capital. We should keep foreign exchange reserves at a moderate level according to the comparison of income and cost and these aspects. To increase foreign exchange, it is necessary to issue RMB to buy RMB, so the supply increases and the RMB depreciates, so the exchange rate falls.