| Since China's reform and opening in 1978, with guidance of the open policy, foreign businessmen have constantly extended the scales and fields of direct investment in China. The ever-promoting quality and efficiency of such direct investment make particular contribution to the increase of national economy. Making a general survey of the process over thirty years for our utilization of foreign funds, it's not difficult to see that the increase of foreign direct investment in China presents some particular stages, separately shown in the phases listed below: 1983-1985, 1988-1989, 1991-1994, 2001-2004, and 2007-2008, of which the last two periods appeared obvious speed-up of growth. Meanwhile, China's price level turned up a periodical fluctuation apparently. The inflation happened respectively during 1979-1980, 1984-1985, 1988-1989, 1993-1995, 2003-2004 and 2007-2008 after reform and opening-up.Specifically, the first growth peak of foreign direct investment happened in 1984, and the growth rate of foreign direct investment was 54.91%. Meanwhile, the price index of consumer climbed to a high level of 9.3% in 1985, reaching the peak of this round of inflation. The second growth peak of foreign direct investment happened in 1988, and the growth rate of foreign direct investment was 38.03%. Meanwhile, in this year the price index of consumer also reached a high level of 18.8%. During the third growth period of foreign direct investment, the growth rate of foreign direct investment increased rapidly since 1991, and the price level was rising continuously during 1992-1994.In1992, the growth rate of foreign direct investment in China reached the peak since reform and opening-up, meanwhile the retail prices of goods and a corresponding consumer prices in 1994 climbed to its highest point since the reform and opening-up. During the fourth growth period of foreign direct investment, the growth of foreign direct investment kept the same pace with the growth of price index. In the three years of 2001,2002 and 2004, foreign direct investment all maintained a high growth rate, meanwhile the price index continued to rise since 2003. Based on the growth of -0.8% in 2002, the consumer price index reached 1.2% in 2003 and 3.9% in 2004. The fifth growth peak of foreign direct investment happened in 2007 and 2008, and the growth rates of foreign direct investment were 18.64% and 23.58%, meanwhile the consumer price level reached a high level of 8.7% in February 2008, which reached a new high level during the 11 years, and the annual level was 5.9%. By this token, the expansion of foreign direct investment kept the same pace with inflation in China. This article lays research stress on the internal relationship between foreign direct investment and inflation. Based on the brief description of foreign direct investment as well as the primary state and present situation of inflation in China, this thesis puts a thorough emphasis on the main transmission mechanism of inflation caused by foreign direct investment; analyzes and shows that foreign direct investment is transmitted to the inflation by means of currency reserves, domestic investments, international trades and exchange rate, etc..Specifically, firstly, on the one hand, the inflow of foreign direct investment directly led to the increase of foreign exchange reserves through foreign exchange. China received the funds through FDI, but these funds are not used for the purchase of foreign capital goods, technology and management experience. In contrast, some companies sold it directly to the central bank after obtaining foreign exchange, and then purchased capital goods in the local places with the RMB, which resulted in large inflows of FDI, at the same time, China's official foreign exchange reserves also had been rapidly accumulated. On the other hand, as a whole, foreign direct investment would have a positive effect on foreign exchange reserves through the export and import substitution, export of profits and re-investment ,etc., which indirectly led to the increase of foreign exchange reserves in China. Under the current foreign exchange management system, foreign exchange reserves increased, and the central bank going market passively was intervented, which caused foreign exchange getting the run upon. And the increase of foreign exchange getting the run upon caused the increase of base currency, and then the increase of base currency led to the multiplied currency supply through the currency multiplier, therefore, large currency supply had a direct pressure on inflation.Secondly, the inflow of foreign direct investment directly led to the increase of investment in domestic support, as foreign direct investment could not immediately turn into real production capacity, and it needed the suitable investment, which was done by the interrelated departments. In general, the useage of foreign direct investment would first induce domestic investment in infrastructure and supporting facilities. At the same time, foreign direct investment drove the expansion of related industries investment through the linkage effect, and such investment expansion occurred strong investment demand effects under certain conditions, thus promoting the increase in aggregate demand. In addition, the bringing-in of foreign direct investment ingeneral would bring new products or new technology, which would increase the competition in the domestic market, forcing some domestic enterprises invested and brought in new technology or increased investment in researching and innovation in order to improve competitiveness. The remarkable demand effects caused by investment expansion more easily led to inflation. Because on the one hand, the investment expansion would directly drive the expansion of demand for investment goods, and the expansion of demand for investment goods was bound to bring about the rising price of investment goods, meanwhile the prices of raw materials related to the investment products and the wage levels in the investment products would increase. On the other hand, it would cause workers to increase money income, which would increase the consumption funds, and promote the total or structural expansion of consumer demand, thereby directly promoting consumer prices and increasing labor wages in the consumer goods industries.Thirdly, on the one hand, foreign direct investment directly affected the host country's foreign trade through the import and export of equipment, technology and raw materials, etc. On the other hand, foreign direct investment improved the productive capacity of host countries through the input of advanced management and technology, indirectly promoting the host country's foreign trade. In China, foreign direct investment enterprises first largely exported labor-intensive products and low-end high-tech products which had a comparative advantage using cheap labor in China, meanwhile they sold these products to other countries, forming the import substitution. And the entry of foreign direct investment enterprises also brought advanced technology and management experience, training a group of professional and technical personnels, which was good for promoting the technological progress of domestic industry, improving the international competitiveness, and thus contributing to China's exports. In addition, the entry of foreign direct investment enterprises would also bring the import of equipment, technology and raw materials, which would increase China's imports to some extent. Expansion of international trade, particularly the expansion of trade surplus, would bring the increase of foreign exchange reserves. If central banks did not take any measures, the increase of foreign exchange would result in an increase in money supply, causing inflation. In addition, international trade would conducte inflation through the price mechanism, because according to "a matter of a price" law, the goods prices of other economies in the world directly turned into a part of domestic prices by importing if the nominal exchange rate unchanged, therefore the international currency expansion would be conducted to the mainland through direct imports of goods. Especially the increase of prices of primary products like oil and raw materials in the international market led to higher costs of related domestic industries, which directly promoted the domestic prices through imports and eventually led to inflation.Fourthly, foreign direct investment flowed into China's trade department, thereby the supply of tradable goods increased, resulting in the increase of current account surplus, and thus promoting the appreciation of the RMB exchange rate. In addition, China's capital market had not been fully liberalized, and the RMB exchange rate didn't achieve the completely free float. RMB didn't fully exchange under the capital and financial account. As China's foreign exchange reserves continuing to increase, people naturally had the expected appreciation to the RMB. People at home and abroad widely considered that the RMB exchange rate was undervalued, especially in recent years, some powerful economies like the United States and Europe continued to put pressure on the RMB appreciation. With the hot domestic stock markets and property markets, foreign and domestic investors benefit a lot from them, which attracted a large foreign capital inflow, furtherly exacerbated the expectation of RMB appreciation. In the case of interest contrast between China and U.S. A. and the steady appreciation of the RMB, a large number of international hot money flowed into China, because for them, transferred capital could gain interest contrast, but also accessed to the benefits of RMB appreciation. Massive inflow of international hot money made domestic inflation problem worse. First of all, the international hot money inflows exacerbated the domestic "excess liquidity", and increased inflationary pressures. A large number of international hot money inflows would lead to the increase of foreign exchange reserves, and the corresponding foreign exchange would increase, thereby increased the money supply. It not only pushed up the asset prices, but also increased the expected price. And the rising expectations drove the inflow of hot money, leading to asset prices furtherly pushed up, thereby increasing the expected asset appreciation, and attracting the inflow of hot money. This cycle would ultimately prick up the increase of the price level.To test the conclusions of theoretical analysis, based on vector autoregressive (VAR), using the annual time sequence data during 1984-2009, this thesis analyzed the dynamic relationship between foreign direct investment and inflation in China, through the establishment of vector error correction model (VEC), Granger causality test, impulse response functions and variance decomposition method. Which reached the following conclusions: First, with the deepening of China's trade openness, inflation to its own contribution was gradually reduced. The explanatory power of total imports and exports to the inflation was rising year by year, while the explanatory power of domestic investment was declining, in which FDI to the explanatory power of inflation was the strongest. It increased at first and then slowly declined. Second, foreign direct investment in the short term had little impact on inflation, mainly because the new FDI had lag effect on the inflation rate. And previous high rates of inflation would inevitably increase the inflationary expectations, which indicated China's inflation was the "inertial inflation to climb." Third, in the long term, foreign direct investment was the principal cause to affect China's inflation, and both lie in a long period equilibrium. Its transmission mechanism is: use of FDI increase→increase of state currency reserves→increase of monetary base which is put into by Central Bank of China by means of mirror image of foreign exchange reserve→increase of national gross of money supply→rise of inflation rate. The article ultimately makes some suggestions from the perspective of policy that the pressure of inflation born of foreign direct investment can be relieved by the enhancement of guiding foreign direct investment, coordination of foreign funds and international trade policies, and deepening reform of foreign currency management system. Furthermore, the article discovers with the methods of establishment of VEC, Granger causality test, impulse response function and variance decomposition, etc., that foreign direct investment in a short run has little effect on the inflation while foreign direct investment in a long run is the principal cause to affect China's inflation, and both lie in a long period equilibrium. Its transmission mechanism is: use of FDI increase→increase of state currency reserves→increase of monetary base which is put into by Central Bank of China by means of mirror image of foreign exchange reserve→increase of national gross of money supply→rise of inflation rate.The article ultimately makes some suggestions from the perspective of policy that the pressure of inflation born of foreign direct investment can be relieved by the enhancement of guiding foreign direct investment, coordination of foreign funds and international trade policies, and deepening reform of foreign currency management system. |
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