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Research on the Conduction Mechanism and Its Effect Between the Scale of FDI and Inflation in China

Author: HuangMingHai
Tutor: LuHongYu
School: Zhejiang Technology and Business University
Course: International Trade
Keywords: foreign direct investment inflation foreign exchange reserves international trade exchange rate
CLC: F822.5
Type: Master's thesis
Year: 2012
Downloads: 19
Quote: 0
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Abstract


Since the reform and opening-up, established the policy of attracting foreign investment to boost the economic development, the scale, the quality and the areas of foreign direct investment in China covered are expanding. Foreign Direct Investment in fact does have made some contribution to China’s economic growth. Reform and opening-up have been passing several decade years, so does the China’s utilization of foreign investment. In1984-1988,199-1997and2007-2008, the growth of foreign direct investment has presented significant. China’s inflation obvious cyclical, so far there has been significant inflation in1985-1989,1992-1999, and2007-2008.Specifically, the first time the inflation peak in1988, the consumer price index has reached such a high level of18.8%, while the annual growth rate of foreign direct investment in1985and1986, when more than100%; second inflation peak in1994, the consumer price index once to the historical peak of24.1%, I must mention that the growth rate of149.95%of the foreign direct investment in1993; since2007, the increase of foreign direct investment speed its peak in2007and2008, the growth rates were17%and22%, At the same time, the level of consumer prices in February2008reached8.7%, the highest in11years, its annual consumer price index105.9. Visible, foreign direct investment and China’s inflation has a strong link.This paper deeply focuses on the internal relations of foreign direct investment and inflation, the inflationary impact of foreign direct investment within the funding mechanisms. We found that foreign direct investment affect inflation by the channels of money supply, domestic investment, international trade, exchange rate and the salary.First, foreign direct investment on the one hand the increase in China’s foreign exchange reserves, on the other hand will indirectly increase the foreign exchange reserves through exports and import substitution, and reinvestment activity. The current exchange rate system, the central bank to buy foreign exchange to invest a lot of money, the formation of foreign exchange, the increase in base money, and then through the multiplier effect of money will be doubled money supply, inflation pressure.Second, the inflow of foreign direct investment will result in increased investment in China. This is due to the foreign direct investment into productivity requires accompanying domestic investment. Foreign direct investment has led to the expansion of investment in related industries, so as to promote an increase in aggregate demand, lead to further increase in the domestic price level.Third, foreign direct investment-related equipment, technology and raw materials imported direct impact on the host country’s international trade. China’s actual situation, along with the constant expansion of international trade, China’s trade surplus is also expanding, which channels by foreign exchange reserves, the impact of inflation. Another path is the price mechanism.Fourth, foreign direct investment brought about our appreciation of RMB. The raise pushed high asset prices and exchange rates, but also to improve people prices expected, exacerbated inflationary pressure in China.Fifth, foreign direct investment brought about the rising of salary. Then, the rising demand and the cost of enterprise result in inflation.Analysis of To test foreign direct investment on the inflation theory correct or not, through the establishment of the error correction model, impulse response function and variance decomposition method, the following conclusions:FDI is the most important factor to affect inflation, it is the money supply The amount of fixed asset investment to play a positive role on inflation, while the total volume of imports and exports from the inflation effect on inflation; FDI has significantly lagged effect. Finally, the paper by optimizing the domestic investment environment and guidance to foreign direct investment and foreign direct investment to ease the pressure on inflation, deepen reform of the foreign exchange physique.

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CLC: > Economic > Fiscal, monetary > Currency > China's currency > Inflation
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