Study Of Relationship Between RMB Exchange Rate And Foreign Direct Investment In China

Nowadays, foreign direct investment(FDI) play an important role in China's economic construction and is one of the main driving engines that stimulate the national economic development. With economic system reform carrying on, the modernization of China needs more foreign capital. The development prospect of Chinese economy in early 21st century depends on inflow of FDI to a large extent. On the other hand, with the entry of China into WTO, further opening-up and the enhancement of optimizing resources via market mechanism, exchange rate, as the main regulating and controlling means and economic lever of macro-economy, is more and more important. So, when global FDI slows down and RMB faces the great pressure of up-valuation presently, it makes sense to master the relationship between RMB exchange rate and FDI for making China exchange rate policy. In this dissertation, firstly, it analyzes the real situation of RMB exchange rate and FDI in China respectively. Secondly, according to theory of international direct investment, the author establishes econometrics models on the basis of the real situation of opening-up and reform in China as an economically powerful country emerging market to analyze quantificationally the relationship between RMB real exchange rate and FDI in China. Thirdly, by using advanced analyzing method, such as Granger Causality Test, this dissertation performs causality test on the relationship between the two variables to verify whether RMB real exchange rate is the cause of inflow of FDI into China. In light of empirical analyses of the data from 1984 to 2003, the dissertation proves there is relativity between RMB real exchange rate and FDI in China, that is, RMB real exchange rate is the cause of FDI inflow into China. But, the author also finds that the effect of exchange rate on FDI from different countries or areas is variable according to their variable investment motivation. As for export-oriented FDI, RMB real exchange rate influences significantly, whereas for market-oriented FDI, it works insignificantly. Recently, many scholars and policy-makers have been discussing the problem whether RMB should appreciate. According to analysis of this dissertation, RMB appreciation will weaken China's ability to attract export-oriented FDI. In return, the decrease of export-oriented FDI will reduce export increase of China. However, export is just one of motivities advancing China economy. Taking present unemployment and weak domestic demand into account, it is impractical to raise RMB value now.