Against the background of hold huge foreign exchange reserves in China，based on the theory of the Agarwal model，an optimal scale analysis framework of foreign exchange reserve based on multi-level dynamic substitution is constructed to investigate the functional evolution of China’s foreign exchange reserve. The paper empirically investigates the correlation of factors affecting demand for foreign exchange reserves in emerging markets with the optimal scale of reserves，and measures the optimal scale and appropriate range of China’s foreign exchange reserves. The study shows that the theoretical size of foreign exchange reserves is determined by different levels of demand，and the optimal scale is based on the dynamic substitution effect. With the evolution of the function of foreign exchange reserves，foreign exchange reserves gradually change from meeting basic trading needs to meeting security and stability needs，which shows that foreign exchange reserves play an increasingly important role in maintaining financial security and stability. Imports，FDI，foreign debt，crossborder capital flows，interest rates and exchange rates have significant impacts on the scale of foreign exchange reserves，and there is significant heterogeneity in the demand for foreign exchange reserves among different types of countries，including BRICS，N-11 and Holders of high foreign exchange reserves. According to the simulation results，the optimal scale of China’s foreign exchange reserves is about USD 1 666. 9 billion，with a moderate range from USD 1 666. 9 billion to USD 2 358 billion. At present，China should give full play to the special role of foreign exchange reserves in maintaining financial security，preventing financial risks and ensuring national financial security.