Foreign Direct Investment On China's Foreign Exchange Reserves

After the Reforming and Opening, China is absorbing more and more Foreign Direct Investment (FDI). Meanwhile, China foreign reserve increase very quickly. This paper tries to discuss the influence of FDI on foreign reserve from both current account and capital account. However, the inflow of FDI is a double-edged sword. On the one hand, the integration of FDI and trade bring on a great increase of trade surplus in China, on the other hand, the outflow of the profit from FDI and the accumulation of profit remaining may raise risk in foreign reserve in the future. Moreover, the inflow of FDI influences the capital account directly which makes "double surplus" and gives a great pressure on foreign reserve in China. Thus, FDI will contribute to trade surplus in China in the short run, but it will threaten the safety of our foreign reserve.The main work in this paper: select the data from 1985 to 2005 as sample, and built a linear multiple regression model to make an empirical study on the relationship between foreign reserve, trade surplus from FDI and foreign debt in China. Then we built a dynamic model to study the influence from profit outflow of FDI. Moreover, we compare the foreign reserve in Japan to that in China. Finally we get a conclusion and make some corresponding policy suggestions.