FDI And Inflation In China: Theoretical Analysis And Empirical Analysis

The global financial crisis in 2008 had great impact on the world FDI. But, compared with other countries, China survived better in crisis, especially in attracting foreign direct investment. In the long run, multinational companies are still considering China as the world's most attractive investment place. As China's economy continues to stabilize, FDI will heavily flow in. Additional, in order to counteract the crisis, China carried out relatively easy monetary policy while the central and local governments also introduced heavy investment plan, which made both scholars and domestic residents produced high inflation expectation. Whether FDI has an impact on inflation, if it has, how FDI will affect inflation, is worth to be studied. This has important theoretical significance and practical significance to understand the characteristics and problems of national economy to draw up and implement policies.This paper selects the relationship between FDI and inflation in China as a subject, uses a method of a combination of theoretical analysis and empirical analysis, and focuses on the impact of FDI on China's inflation and transmission mechanism. Firstly, it reviews the development history of FDI as well as four inflations in China since Reform and Opening Up. Afterwards, it analyzes their relationship qualitatively in the Quantity Theory of Money Theory and the Aggregate Demand-Aggregate Supply Model. Then, it analyzes the relationship quantitatively using Cointegration Test, Impulse Response analysis and Variance Decomposition analysis based on Structural Vector Autoregression Model (SVAR). Monthly data of CPI, FDI, Money Supply Amount, Fixed Assets Investment Amount and Average Wage Amount are from 2000 to 2008. Finally, it gives appropriate countermeasures according to theoretical analysis and empirical results.From empirical results, it shows that FDI, Money Supply Amount, Fixed Assets Investment Amount and Average Wage Amount are some of factors affecting the inflation in China. FDI will increase Money Supply Amount, Fixed Assets Investment Amount and Average Wage Amount through one or some channels, then pushing price level up.