It is a striking economic phenomenon that China’s foreign exchange reserves reached $US 606.9 billion. This paper pursues to explore the underlying motivations and implications by not only analyzing the complicated relationships between the Chinese economy and foreign exchange reserves but also establishing a tentative model to evaluate the adequacy of foreign exchange reserve holdings. The model has successfully confirmed that China’s recent holdings of foreign exchange reserve, in particular in 2004, appeared to exceed the adequate level largely due to speculative hot money inflows when the Chinese currency Renminbi had been expected to appreciate.