The Influences Of Appreciation Of RMB On Inward FDI In China

The People's Bank of China announced to transform the exchange rate-forming mechanism of RMB on July 21 of 2005. From that time, RMB began to appreciate remarkably and constantly. According to international investment theory, exchange rate level will influence FDI. China is a large host country of FDI in the world, we have necessity to study deeply the influence of RMB appreciation on Chinese inward FDI.Foreign scholars commonly consider the devaluation of one currency will promote FDI, and appreciation of one currency will have opposite effect. Our scholars studied facts in China, but the conclusions are quite different. This paper analyzes again the influence of RMB appreciating on FDI quantity on the basis of classifying the FDI into Chinese-market-seeking type of FDI and non-Chinese-seeking type of FDI, and for the first time analyzes the influence of RMB appreciating on FDI quality, thereby I draw a new conclusion and make new countermeasures. The first chapter sums up and comments on the related studies domestically and abroad. The second chapter analyses the mechanisms of exchange rate influencing foreign capital flow, including wealth effect, production cost effect, capitalization rate, import and export effect, expectation effect. The third chapter analyses RMB exchange rate features, and draws a conclusion: RMB will appreciate constantly in the long run. This chapter also analyses the features of FDI in China, the main purpose of Chinese-market-seeking type of FDI is to evade trade barrier and occupy Chinese market. Products manufactured by this type of FDI are mainly sold in China, their projects scale are large, their technique is advanced. The main purpose of non-Chinese-market-seeking type of FDI is using Chinese cheap labor resources and other resources, their products are labor intensive and export in large scale, their projects scale are commonly small. This is the foundation for analysing influences of appreciating of RMB on the two type of FDI. The fourth chapter analyses the effects of RMB appreciation on these two type of FDI. For Chinese-market-seeking type of FDI, appreciating of RMB will reduce cost of their production, it also will increase their revenues. When profits are exchanged into foreign currency, they will appreciate at the same rate of RMB appreciating, the enterprise assets will appreciate when it is measured by foreign currency. The expectation of RMB appreciating will promote this type of investors to invest in China, labor cost increasing measured by foreign currency will not restrain FDI, because labor cost only constitute a little proportion in total cost. Since this type of foreign enterprises only export a little, appreciating of RMB influences this type of enterprises slightly. Therefore, appreciating of RMB will promote this type of FDI inflow. For non-Chinese-market-seeking type of FDI, appreciating of RMB will decrease their export, but their products are lack of price-elasticity, so the decreasing extent of export is limited. Appreciating decreases their revenues and weaken investor's faith in investment. Their profits and enterprise assets will appreciate when they are measured by foreign currency with the appreciating of RMB. When this type investors expect appreciating of RMB, from the point of maintaining value and appreciation, investors will accelerate investing, from the point of revenue, investors will decrease investing. As a whole, appreciating of RMB will decrease this type of FDI inflow. Decrease in non-Chinese- market-seeking type of FDI inflow is favorable for China. For the moment, China is not lack of funds, but China is lack of advanced technique, lack of organization and management knowledge. Non-Chinese-market-seeking type of FDI constitute a big proportion of our inward FDI, this causes imbalance of our industrial structure and causes our technique developing slowly. Appreciating of RMB will lead to appropriate source and industrial structure of FDI, consequently promote foreign enterprises upgrading their technique.Considering influences of appreciating of RMB on FDI mentioned above, we should appreciate RMB steadily, at the same time, finance supervise section should reinforce supervising and management to prevent speculative capital disturbing finance stability. Government should execute positive fiscal policy for the purpose of promoting consuming. From now on, we should pay more attention to the quality of FDI, optimize domestic invest environment, so that we can attract more high quality FDI.