The Analysis Of The Impacts Of China’s Foreign Direct Investment Inflows On RMB’s Exchange Rates

China has been active in attracting foreign direct investment ever since the reform and openingpolicy. The foreign direct investment to China, which had contributed to the supplement of capitaland the support of technique, kept increasing during the recent years. With the development ofinternational trade, China had obtained huge trade surplus which had worsen the relationship withcommon trade partners. Developing countries such as USA and those in the Europe had pressuredChinese government to revalue RMB in order to eliminate their loss on trade deficit. In2005, Chinaadopted the new managed floating exchange rate regime that stated the exchange rate of RMB wasdecided based on the supply and demand in reference to a basket of currencies. Since then, RMBhad experienced constant appreciation.The stability of currency value contributed to the economic increase and smooth of domesticfinancial markets. As an important part of international capital flows, foreign direct investment hadclose relationship with exchange rates. Therefore, it is of great significance to investigate theimpacts of foreign direct investment on the RMB exchange rates.In the earlier parts of the dissertation, after the review of relevant literature, the impacts of foreigndirect investment on exchange rates had been analyzed based on PPP theory, production functiontheory, Balassa-Samuelson effect and basic equilibrium exchange rate theory. The mechanism of theimpacts was followed. Stick to the principle of qualitative after quantitative, the dissertation setthree periods during the period from the opening and reform policy until now, compare the impactsand their mechanism in each period and brought about the obstacles in realizing the impacts. Theresult showed that although there existed several years in which the relationship was negative, thecommon trend was positive. In the quantitative research, based on a model which was summedusing previous research, a series of ecometric tests were conveyed such as ADF test, Johansen testbased on VAR, ECM based on VEC and Granger Casualty test. The results indicated that theforeign direct investment had a positive impact on the exchange rate, and it can be used to estimateand predict the trend of RMB exchange rate.In the latter parts of the dissertation, policy advice was given. It was pointed out that the foreign direct investment structure should be modified and the efficiency of using capital should beincreased. In the respect of the choice of exchange rate regime, floating exchange rates should berealized in a gradual manner.