What exactly is the Foreign Exchange Reserve?

I came to realized that most people are confused when they read about China and hear on the news about terms like: Foreign Exchange Reserves, Current Accounts Surplus, Pegging, undervalue, etc. So today, I'll do a little write up to explain what exactly is Foreign Exchange Reserves and how the central banks around the world controls these deposits to influence their currency and economy.

By Definition, Foreign exchange reserves in a strict sense are only the foreign currency deposits and bonds held by central banks and monetary authorities. However, the term in popular usage commonly includes foreign exchange and gold, SDRs and IMF reserve positions. FX operations will cause an expansion or contraction in the amount of domestic currency in circulation which in the end affect a central bank's monetary policy and inflation. And this is how it works:

Lets start by giving a real example. When we hear that the Chinese are artificially keeping they currency pegged at a certain level, how do they do it? To maintain the same exchange rate level and not allowing it to go higher even if there is increase demand for the currency (when there is a increase demand, RMB value should go up and therefore keeping it at the previous level is why they say the RMB is undervalued), the central bank of China can issue more of the RMB (print money) to purchase foreign currencies, which in this case is the US dollar. This will increase the sum of FX reserves for China (increase of US dollar in their reserve) and the RMB's value will be held down since the supply of the RMB is increasing. This artifically keeps the Chinese goods cheap for US consumers to therefore increase exports and maintain growth/GDP. However, this may provoke domestic inflation for China. In theory, the manipulation of foreign currency exchange rates can provide the stability that a gold standard provides and large reserves allow a gouvernment to better manipulate exchange rates. On the other end, since the amount of foreign reserves available to defend a weak currency (a currency in low demand) is limited, a foreign exchange crisis or devaluation could be the end result if that was the case.

Well hope I explained it well, here is a list of countries by FX reserves:

Feel free to add anything I missed!