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Study on RMB Exchange Rate Level and Its Volatility’s Influence on Foreign Direct Investment into China

Author: XuWenYan
Tutor: RanMaoSheng
School: Chongqing University
Course: Finance
Keywords: Foreign Direct Investment RMB Effective Exchange Rate Bilateral Exchange Rate Volatility
CLC: F832.6
Type: Master's thesis
Year: 2009
Downloads: 312
Quote: 0
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Foreign Direct Investment which brings China abundant capital, technology and experience in administration contributes a lot to China’s economic development. On the other hand, with China’s entry into the WTO, the further opening-up will bring allocating resources via market mechanism furthermore. Nowadays, with the background of the reform of the RMB exchange rate regime, RMB will go on appreciate and its volatility will increase, so exchange rate will undoubtedly influence the capital structure into China.This paper firstly gives a brief summarize of the theory between exchange rate and Foreign Direct Investment, including the theory between exchange rate level and FDI, the theory between exchange rate volatility and FDI, then the primary conclusion is that: The export-oriented FDI will be more easily influenced by exchange rate.The qualitative analysis in the paper including: the industrial structure and the source structure of China’s FDI, the character of China’s FDI, RMB exchange rate level and it’s volatility’s influence on China’s FDI. The quantitative analysis including: RMB effective exchange rate and it’s volatility’s influence on FDI which is divided by industry, bilateral exchange rate and it’s volatility’s influence on FDI which is divided by parent country (district).This paper divides China’s FDI by industry or by country (district) respectively, main results of quantitative analysis are as follows:①The level of RMB exchange rate is the significant dominator of FDI into China, no matter effect exchange rate or bilateral exchange rate, the appreciation of RMB will restrain foreign direct investment into China, in contrast, it’s depreciation will promote FDI ;②As far as exchange rate volatility is concerned, the volatility of RMB effective exchange rate will restrain FDI into every manufacturing sector; meantime, the volatility of bilateral exchange rate will restrain FDI from Japan and United States significantly.③There exists significant sector effect between RMB effective exchange rate and FDI into Chinese manufacturing sectors; meanwhile, there also exists significant country effect between bilateral exchange rate and FDI from main parent countries (districts). In light of the conclusion of the paper, we suggest: in the view of exchange rate, in order to create a sound investment environment for foreign business, we should keep long exchange rate stable and reasonable in the circumstances of short-time exchange rate’s flexibility.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Exchange rate,foreign financial relations
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