The Research On RMB Exchange Rate Expectation’s Influence On Foreign Direct Investment Into China

Foreign direct investment (FDI), as one kind of international capital flows, itsopportunity, scale and structure flowing into a country have close relation to exchange ratechanges. After the reformation of exchange rate system in2005, the RMB exchange rateexpectation has been enhancing, with the flexibility of RMB exchange rate increasing. RMBexchange rate expectation has became an important factor impacting the size and structure ofFDI, for international investors’ expectations for one currency exchange rate’ movements willdirectly affect their investment decisions to one country. China’s economic development is ina critical moment. Stabling economic growth, adjusting industrial structure and promotingeconomic transition can not do without the participation of foreign capital. Therefore, to studyon the influences RMB exchange rate’s changes have, especially RMB exchange rateexpectations’ changes have on FDI, will be very significant.Combining theory and empirical methods, this paper researches on the influence RMBexchange rate expectations had on FDI flowing in China during July2005to June2012. Thispaper includes five parts. The first part reviews the literatures at home and abroad aboutexchange rate expectations and FDI. This part carries out in three aspects, such as FDI basedon exchange rate motivation, exchange rate expectations, influence RMB exchange rateexpectations on FDI. The second part is the theoretical basis of the study. Elaborate theconcept and formation mechanism of exchange rate expectations, the motivations of FDI andthe mechanism of exchange rate expectations affecting on FDI. The third part is empiricalanalysis on features of RMB exchange rate expectation. Taking NDF exchange rate as ameasure of exchange rate expectation, make descriptive statistics and econometric regressionanalysis, and come to the result that there are both adaptive expectations and extrapolationexpectations. The fourth part is empirical analysis on the impact of RMB exchange rateexpectations on FDI. Basing on the feature judgment of RMB exchange rate expectations,construct overall FDI model and structural FDI model, and analysis the short-term andlong-term effects of RMB exchange rate expectations on the size and structure of FDI by themethods(such as co-integration test and error correction model). It aims to test wether theempirical result is consistent with the theoretical inferences or not. The fifth part is conclusion. The main conclusions: there are both adaptive expectations and extrapolation expectations,that is, RMB exchange rate expectations have characteristics of irrationality and heterogeneity;foreign investors primarily based their investment decisions on adaptive expectations;appreciation expectations of RMB exchange rate will promote the increase of FDI, increasethe proportion of market-oriented FDI, and reduce the proportion of cost-oriented FDI; slightgradual appreciation can guide adaptive expectations to keep playing positive role, reducefluctuations in the economy,stable economic growth, push forward economic restructuringgradually.