In the nearly four decades since China launched its reform and opening program，it has relied on export-driven economic development. Over this period，as part of the growing levels of economic exchanges，funds have flowed on a daily basis between China，its neighboring countries and the world's major economies. As a result of the inflows of funds from abroad，China's central bank accepts and manages foreign exchange on behalf of the state. It uses these foreign exchange funds to meet the nation's total overseas obligations. At the same time，it uses some of these funds to intervene in the foreign exchange market to reduce volatility in the renminbi exchange rate and ensure that the national currency remains stable and provides a favorable environment for China's economic development. In short，from the national perspective，the main purpose of foreign exchange reserves is to meet daily needs and ensure there are sufficient funds to cover any unanticipated events. These funds should not be viewed as a cash cow that produces high returns. To do so would be like investing all of a family's wealth in the stock market in search of big profits while ignoring considerable levels of risk.

Creating Foreign Exchange Reserves

As we examine foreign exchange reserves we need to look at the demand side of the economy as measured by the gross domestic product. Some of the nation's economic output is used to meet consumer demand as well as investment needs (including from the private and public sectors)，while the rest is exported abroad.

If we drill down and look at individual enterprises that export goods or services，we see that these exports are exchanged for US dollars or another foreign currency. The net exports of all these individual micro-level manufacturers are aggregated to form national macro-level exports. The US dollar income earned from all these exports will be reflected in the national balance of payments and recorded under the current account.