The Effect Of RMB Exchange Rate On FDI Inflow Into ASEAN

Foreign Direct Investment has made great contribution to the economic development of many developing countries. The FDI inflow into China has kept increasing since the Open-door policy took effect, which evoked great anxiety of many developing countries, especially the South-East Asian governments. They thought that, compared with China, they were losing attraction for foreign investors. According to some scholars, the rapid growing amount of FDI was due to past undervaluation of the RMB. However, on July 21, 2005, China carried out its RMB exchange rate reform and started to peg its exchange on a variety of currencies, rather than solely on the U.S. dollar and the RMB nominal exchange rate steadily appreciated against the U.S. dollar from then on. At the same time, the amount of FDI inflow into the ASEAN has exceeded its highest level before the Asian Financial Crisis. Then, do the fluctuations of RMB exchange rate have influence on the FDI inflow into the ASEAN and what influences do they have?On the basis of related literature reviews, this thesis combines the reform and policy of exchange rate with the characteristics of FDI in China and main ASEAN countries, analyzes the impact mechanism of RMB exchange rate, and utilizes the panel data and FDI Decision Model to find the impact of RMB exchange rate on FDI inflow into ASEAN. The results imply that both the level of exchange rate and its fluctuation range have significant impact on the FDI inflow into ASEAN. The former has negative impact through cost-effect and wealth-effect channels and the latter has positive impact on FDI inflow into ASEAN through risk-effect channel.The findings of this thesis reveal that a country should pay attention the international coordination when making economic policies and consider not only the impacts on domestic economy but also the impacts on the other economies, especially those who have the similar economic structures. As China's economic power is increasing gradually, we need to maintain regional economic stability, strengthen mutual coordination and cooperation to create favorable financial environment.