Excessive foreign exchange reserves will lead to the appreciation of the local currency, which will lead to inflation. For example, the dollars earned by enterprises in export business will be forcibly converted into RMB by the State Administration of Foreign Exchange according to the quotation at that time, which is equivalent to actually increasing the currency in domestic circulation, and the actual circulation link increases the inflationary pressure naturally caused by the currency.

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.

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The balance of payments deficit will lead to the decrease of foreign exchange supply and the increase of domestic foreign exchange market demand, which will increase the foreign exchange rate and decrease the local currency exchange rate. If the government takes measures to intervene, that is, selling foreign currency and buying local currency, the government must have sufficient foreign exchange reserves, which will further lead to the depreciation of the local currency.

Government intervention will directly lead to the reduction of domestic money supply, and the reduction of money supply will lead to the increase of domestic interest rates, leading to economic decline and increased unemployment. Judging from the causes of the balance of payments deficit, if the balance of payments deficit is caused by the current account deficit, it will inevitably lead to the reduction of employment opportunities in export-related departments and the economic downturn.

People's Network-Why the more foreign exchange reserves, the better?