RMB Exchange Rate, Foreign Direct Investment And Chinese Economic Structure

China has made a great achievement on attracting foreign directinvestment.From1990to2010, the average annual growth rate of FDI inflow toChina is8%and until the end of2010, Chinahad cumulatively attracting FDI morethan1.12trillion U.S. dollars. In the early stages of attracting foreign investment, FDIin China’s has played important role on economic growth, exports, investment infixed assets, employment and so on, however,as the wheels of history was up to today,Chinahas experienced30years of rapid development, Chinese gross national product(GDP) reached39.7983trillion Yuan in2010and became the second largesteconomies in the world, but meanwhile we also faced a lot of problems, such as theimbalances of trade and economy, unreasonable economic structure. As to FDI, whatwe need is to promote business innovation, add industrial value and efficiency, weneed rely on FDI to improve the competitiveness of our product and promote thereasonable development of industrial structure.In recent years, domestic exchange rate has been very concerned by theoreticaland political level. As we known, changes on exchange rate depends on many factors,but due to the characteristics of the manufacturing industry and the particularity of theChinese economic structure, trade balance of payments is the key factor about RMBexchange rate level. Since2003, as the rapid growing of Chinese trade surplus andforeign exchange reserve, some European and American countries have begun to putpressure on China to revalue its currency. On July21,2005, the reform of a secondmajor exchange rate has been implemented when China reformed the RMB exchangerate regime by moving to a managed float on market supply and demand withreference to a basket of currencies. From July21,2005to2010, except the period ofsubprime mortgage crisis, as one of the package measures to deal with crises, thechange in exchange rate was very little, RMB exchange rate is always in theunilateral appreciation state, which has a significant impact on Chinese economicstructure and exchange rate itself. The starting point of the paper is to analysis the relationship of RMB exchange rate and FDI in China and studies the reasons for theserelationships.Exchange rate change and foreign direct investment is a more traditional topic inInternational Economics. The impact of RMB exchange rate change on FDI alsoattracted a number of researchers,but these studies are mostly based on the totalamount of data or different sources of FDI, whichnot only can not reflect the changesin the quality of the foreign direct investment, are more likely to cover different typesof Variations in FDI. In the context of above theory and present situation, the focus ofthis paper is not only analysis of the impact of exchange rate changes on the size ofFDI, what’s important, illustrates the way and channel of RMB exchange rate andFDI impact Chinese economic development and economic structure.The whole text consists of six parts. Chapter1states the background of the topic,research route and method, as well as the innovation points of the text. Chapter2introduces the theoretical framework of the exchange rate and FDI, and a literaturereview is also contained in this chapter. In Chapter3, we firstly state thestatisticallyanalysis of the relationship of RMB and FDI, and then verify the inherent relationshipbetween them by empirical approach. In Chapter4, we bring the issue of the elasticityestimation into according empirical approaches to analysis the dynamic relationshipsand real effect. In Chapter5, from the view of Chinese economic structure, analyzethe formation mechanism of the relationship between them; Chapter6consists of theconclusion of the text, prospect and future research direction.The conclusions are as follows. First, in all, the appreciation of RMB wouldpromote the inflow of FDI in China, from the view of empirical analysis, the result isrobust. Second, model shows that nominal exchange rate, real exchange rate andexpected exchange rate impact the behavior of multinational corporations throughdifferent channels, and expected exchange rate play increasing role in attracting FDI.Meanwhile, it also can explain why after2005, statistice on FDI of CommerceDepartment and of BOP on FDI (credit) has obvious difference; why the form of soleproprietorship FDI grows substantially; why trade structure is deficit of East Asiancountries and regions at the same time the wealth surplus of Europe and United States.Third, RMB exchange rate, exchange rate expectations, FDI, housing price appears the state of circular rising, that’s mean, real estate prices prompted a further inflow ofFDI, at the same time exchange rates and FDI also further driving up real estateprices.Fourth, appreciation of host country currency would generate two oppositefunctions on the relationship between exchange rate and FDI under the circumstanceof exporting final goods and inporting intermediate goods simultaneously. It bringsup the fact that appreciation of RMB promotes FDI inflowing into China.However,importing intermediate goods would cause added value rate in the slugglish state andreduces the industrial relevance effect.