【正文】 f sources, foreign exchange reserves can be divided into creditor’s rightsbased reserve and debtbased reserve. The former is reserve from current accounts, whereas the latter is from the capital accounts．Foreign exchange reserves of developing countries are mainly posed of debtbased reserve. Since the latter half of the 1990s, the structure of China’s foreign exchange reserve sources has undergone significant change. From 1994 to 1996, China’s foreign exchange reserves were mainly posed of debtbased reserve. The increased foreign exchange reserves mainly came from capital account surplus, which mainly resulted from the increase in foreign direct investment(FDI)．Since 1997, the creditor’s rights segment of China’s foreign exchange reserves has gradually bee more increased. However, during 20032004 the debtbased reserve rebounded dramatically. In that period, the capital account surplus soared from US$ in 2003 to US$ in 2004, and China’s foreign exchange reserves increased by US$ in2004. This was closely related to the continually growing expectations toward renminbi revaluation and the influx of international“hot money”in pursuit of speculative gains.It is noteworthy that since 2004, the expectation for renminbi appreciation has been growing continually and a large amount of speculative capital has swarmed in. The Central Bank has adopted a pulsory foreign exchange settlement policy to maintain the relative stability of the renminbi exchange rate, which is an important factor behind expanding foreign exchange reserves. Seen from the current situation and the development trend in the near future, the factors that have caused expansion of China’s foreign exchange reserves will continue. Admittedly, the sustained surpluses in the current and capital accounts of China’s balance of payments in recent years are the main reason for its continually fastexpanding foreign exchange reserves. However, two fundamental factors are worth considering：(i) flaws in the formation of the renminbi exchange rate regime are the institutional root cause of sustained high growth of foreign exchange reserves and (ii) the various theoretical misconceptions about China’s foreign exchange reserves have swayed policies and contributed to the sustained fast growth in China’s foreign exchange reserves.In terms of institutional causes, the eruption of the 1997 Asian financial crisis held back the process of the China’s reform of the renminbi exchange rate renminbi came under great pressure to depreciate. To maintain the stability of the renminbi exchange rate, there was a forced departure from the original“managed floating exchange rate regime.” In the wake of the crisis, the Chinese economy was afected by the global economic recession and worsening deflation, which has gradually made the renminbi exchange rate regime shift to a factor“USdollarpegged fixed exchange rate regime.”Apart from the external impacts, the errors in China’s macroeconomic policies an d strategies, such as those concerning foreign trade, foreign capital, foreign exchange reserve and industrial policies, have led to a distortion in the formation of the renminbi exchange rate regime．An obvious feature of that distortion is the pulsory settlement and sales of foreign exchange in the banks, and the closed interbank foreign exchange market. In such an institutional framework, the implementation of the pulsory foreign exchange settlement and sales, the convertibility of the current accounts and the Central Bank’s control on the foreign exchange position of the banks designated for foreign exchange operations have meant that banks, enterprises and residents unable to hold foreign exchange at their own wil1. The Central Bank, meanwhile, holds a considerable amount of foreign exchange in the form of state foreign exchange reserves. Such an arrangement will definitely lead to the sustained an d accelerated expansion of foreign exchange reserves.In terms of policy orientation, there have long been many theoretical misconceptions regarding the basic functions and roles of foreign exchange reserves：for example, that foreign exchange reserves equal economic strength, exaggeration of the function of foreign exchange reserves, and accumulating reserves without definite and justifiable reasons. All these factors have strongly pushed the sustained high growth of China’s foreign exchange reserves.III．Analysis of the Theoretical Misconceptions onChina39。s Foreign Exchange Reserves1．Regarding the Opinion that Foreign ExchangeReserves Equal Economic StrengthSince the 1990s, there has been a popular opinion that the more foreign exchange reserves China has, the better it is, and that the growth of foreign exchange reserves reflects China’s economic strength and improvement of its international status. The rapid growth in foreign exchange reserves is seen as a sign of sound economic operation. In reality, this is a biased viewpoint that fails to appreciate China’s actual economic condition．Foreign exchange reserve is a balancing item for international payments, which is closely related to various aspects of the economy and to changes in the world economy. In considering the rational scale of foreign exchange reserves, one must take into account various factors in the economy，including the scale and development pace of the national economy, the level of economic opening up and foreign dependency, the level and structure of foreign trade development, the level of utilization of foreign investment and the capacity of financing internationally, the efficiency of economic adjustment and regulation, and the foreign exchange management system. From an international perspective，developed countries are more powerful in terms of overall national strength, and have better macroeconomic regulation frameworks. Their home currencies are convertible and can be used for international payments. Therefore, their demand for foreign exchange reserves is relatively w