The Effects Of Foreign Capital Inlfow On The RMB Exchange Rate

This paper establishes a behavioural equilibrium exchange rate model and based on itresearches into the effects of foreign capital inflow on RMB exchange rate. It aims atexamining the effects of capital inflow on exchange rate movements with the evidencefrom current China. It is also intended to present some policy implications and suggestionsfor China regarding the construction of its capital system and RMB exchange ratemanagement at the new stage of further opening up.With the deepening of China’s reform and opening up, a large number of foreigncapital flow into China, because of the stable political environment and the favorableinvestment environment. However, while foreign capital inflow brings opportunity toChina’s economy development, it also leads to some challenges. In recent years, RMBexchange rate continuously rises seriously affecting China’s export trade. Whether foreigncapital inflow results in the phenomenon or other factors? If it works, how it does and whatthe theory is? These all need further research. Existing domestic research is scarcely andlimited in depth, which is clearly insufficient to answer these questions. So, based on thecurrent situation of China’s economic development, the paper gives further studies in thisfield and the conclusion will provide scientific suggestions for the reform of China’sexchange rate policy and monetary policy.This paper combined the qualitative analysis with quantitative analysis, normativeresearch with empirical research to discuss about the effects of foreign capital inflow onRMB exchange rate. Firstly, it analyzes the exchange rate determination theories related toforeign capital flow, and clarify the function mechanism of foreign capital inflow on theexchange rate; secondly, it analyses the situation of China’s foreign capital inflow, thehistorical evolution of RMB exchange rate system and the exchange rate level in eachperiod. Through qualitative analysis, we found that China’s foreign capital inflow andRMB exchange rate are all rising; finally, it researches the correlation between foreigncapital inflow and RMB exchange rate by using Johansen cointegration test, grangercausality test and constructing the VEC model. The result shows that there is a long-termequilibrium relationship between foreign capital inflow and RMB exchange rate; in theshort term, FDI has a great influence on RMB exchange rate, while Non-FDI has no effects.The granger causality test further proves that foreign capital inflow is the granger reason ofRMB exchange rate, while RMB exchange rate is not the granger cause of foreign capitalinflow. This paper can be divided into five chapters: the first chapter is introduction, it brieflyintroduces the research background and significance, the research situation of domestic andforeign scholars, and the innovation and difficulties of this paper; the second chapter istheoretical research, it analyzes the exchange rate determination theories related to foreigncapital flow, and illustrates the impact mechanism of foreign capital inflow on theexchange rate; the third chapter is qualitative research, it mainly introduces the status quoof foreign capital inflow, the historical evolution of RMB exchange rate system andvarious periods of RMB exchange rate level; the fourth chapter is quantitative research, itmainly carries out Johansen cointegration test、Granger causality test and constructs theVEC model to research the relationship between foreign capital inflow and RMB exchangerate; the fifth chapter is policy recommendations, based on the empirical research, itpresents some policy implications and suggestions for China regarding the construction ofits capital system and RMB exchange rate management.