Effect Of Foreign Direct Investment Of RMB Exchange Rate Changes

Since1992, China has begun to transfer to socialist market economic systemgradually, andChina’s FDI has entered a stage of rapid development. The changes ofpolicy and soft domestic investment environment create a great condition for FDI. Inthis case, large-scale FDI come into the China.After China’s exchange rate reform inJuly2005,the RMB exchange rate has become more flexible. In the same time, anumber of Western countriesask for the appreciation of RMB and China has beenfacing this tremendous pressure for a long time. It has been a key concernwhether theappreciation of the RMBwill impact the China’s FDI. Therefore, it is very necessaryto do the research on the relationship of real effective exchange rate(REER) and FDI.Firstly, on the basis of the cost-effective theory, the wealth effect theory, theoryof fluctuations in exchange rates and real options theory, we analysis the relationshipbetweenREERof RMB and FDI. Secondly, we talk aboutthe changes of RMBexchange rate regime and the law how REER of RMB changes. Thirdly, we elaboratethe development process of China’s FDI; analysis the industrial structure, capitalstructure and regional structure of China’s FDI; discuss the factors that influence thelevel of FDI including market scale, investment cost and so on. Finally, based onpanel data from1992-2011, we use the gravity model and period’s dummy variablesto analyze the relationship between the REER of RMB and China’s FDI.The conclusions of the empirical analysis show that the REER of RMB and FDIwere negatively correlated between1992and2011, and the elasticitywere different indifferent periods. So the devaluation of the RMB could promoteFDI, and theappreciation of RMBwould have a negative impact on FDI. Besides, the level of theinfluence is affected by the period and national policies. Besides, GDP of China, thedistance between China and investing countries, and the cost of labor also have aninfluence on FDI. Therefore, all these factors should be considered when we make thepolicies to promote FDI. We should establish a reasonable and effective exchange rate mechanism, improve the financial market mechanism,improve the domesticinvestment environment, strengthen cooperation with neighboring countries andimprove the quality of our labor.