The Effect Of RMB Real Effective Exchange Rate And Its Volatility On FDI Inflow In China

Since July 21.2005, China began to adopt a managed floating exchange rate system that is based on the market supply and demand, adjusted by a package of currencies and regulated by related rules. The former fixed exchange rate system that pegged to U.S. dollar was replaced by a more flexible exchange rate system. Since then, the RMB began to appreciate remarkably and constantly. In this context, how will the continuous appreciation and volatility of RMB affect the inflow of FDI to China, positive impact or negative impact, on what degree of the impact? Can the revolution of exchange rate system conflict with China's policy on attracting foreign direct investment and impact the different industries similarly? There are great practical significance on promoting the China's overall economy and the adjustment of structure of industry to study these questions.Referring to domestic and international research results, this article analyzed the impact of the level movement and volatility of REER on FDI with a method including theoretical and empirical analysis. In the theoretical analysis, based on the theoretical model of Jinping Yu, this article created a two-stage model to analyze the impacts of the level movement and volatility of exchange rate on market-oriented FDI and resource-oriented FDI respectively, from the perspective of how MNC making investment decisions. In the empirical analysis, this article firstly measured the volatility of REER with a GARCH model, and then analyzed the long-term impact and short-term impact of exchange rate on FDI from the national level and industry level respectively.The results showed that there is a significant long-term negative relationship between the level movement of REER and FDI, and the former also has a lagging effect on the latter. When it comes to volatility of REER, its impact on FDI is insignificant in long-term, but the negative coefficient showed a negative relationship between the two. In short-term, the volatility of REER has a negative lagging effect on FDI. The movement of REER also affects industries differently. Overall, the relationship between REER and agriculture FDI is insignificant; for resource-oriented industries, the appreciation of RMB can reduce the FDI inflow in long-term, but affect the market-oriented FDI inflow on the appositive direction. In terms of volatility, the volatility of REER impacts the inflow of FDI to textile industry, pharmaceutical and chemical industry, equipment manufacturing industry positively, but for services industry and real estate industry negatively. According to short-term dynamic analysis, the level movement of REER has positive lagging effect on all industries'FDI inflow except real estate industry and agriculture industry; the volatility of REER has negative lagging effect on all industries'FDI inflow.Finally, this article put forward some useful suggestions about how to attract FDI and promote the development of three major industries on the basis on theoretical and empirical analysis.