Research On The Renminbi Real Effective Exchange Rate Volatility's Effect On FDI

Chinese economy has witnessed 30 year high speed growth since its reforms and opening up in 1980. This"China Miracle"has much to do with the long term strategy"Bring in and walk out"without any doubt. In this process, foreign investment enterprise played an very important role, according to the statistics of world investment report 2007 by the United Nations, foreign investment in China reached 69.468 Billion USD in 2006, accounting for 8% of fixed assets。China took over the United Sates to be the first country to absorb FDI in the world for the first time in 2002, and have been among the first 3 countries in the ranking post. The stock of FDI accounts occupies 11.1% of GDP in 2006. during the"tenth five year plan", China has absorbed FDI of more than 270 billion USD, ranking 3rd in the world and 1st among the developing countries.There are many reasons to explain the high growth of FDI in practice such as China's advantage in absorption FDI, stimulation policy and stable RMB exchange rate system. The large scale fluctuation of RMB will destruct our attraction to absorb FDI, which will not only affect our export of high technology products, but also affect our economic growth. Then what kind of role will RMB exchange rate and its fluctuation play in the flow of FDI?This paper employs GARCH model to analyze short term and long term effect of exchange rate fluctuation on FDI and the result shows that the negative effect of RMB exchange rate fluctuation is apparent. Generally speaking, the large fluctuation of RMB reduces the absorption of FDI and vice versa. The paper combines normal analysis and positive analysis, deduction and reasoning, researches systematically the of RMB exchange rate fluctuation on FDI, offers theoretic and practical proof for state investment absorption strategy and provides constrictive suggestion for RMB exchange rate system.