The impact of change in exchange rate on foreign investment in China from 2005 to 2020

Chen, Tingyu (2023) The impact of change in exchange rate on foreign investment in China from 2005 to 2020. [Dissertation (University of Nottingham only)]

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The main objectives of this study are to determine (1) whether monthly changes in the RMB exchange rate directly affect FDI in China from 2005 to 2020, (2) whether China's FDI directly affects the exchange rate in China from 2005 to 2020, and (3) whether the Sino-US trade war has an effect on some FDI components. The period of fixed exchange rates has officially ended as of July 2005 in order to accommodate economic globalization and domestic economic growth. The RMB has continued to increase after the exchange rate deregulation. Determining whether changes in the RMB exchange rate have an effect on FDI inflows to China, if FDI inflows to China have an effect on the RMB exchange rate, and the impact of the U.S.-China trade war on the FDI component from both theoretical and practical perspectives.

This thesis uses cointegration theory and the Granger causality test to examine the relationship between the nominal exchange rate of the RMB and FDI using monthly data from July 2005 to July 2020. The results demonstrate that the RMB nominal exchange rate is a Granger source of FDI and that there is an equilibrium relationship over the long term between the two variables. We may also infer from the cointegration equation's computation that FDI is encouraged by the depreciation of the RMB exchange rate. In this paper's further study, it is discovered that relative wealth and production costs have a significant impact on how exchange rates affect FDI flows. The trend of FDI in developing nations is gradually increasing as a result of reform and opening up policies as well as China's WTO membership. However, some FDI components, including manufacturing, mining, and the whole sales and retail sector, were impacted by the US-China trade war in 2018.

Based on these studies, China should foster an environment that is friendly to foreign investors in terms of hardware and software, further economic development, and increased average efficiency of Chinese capital, as well as the establishment and development of a capital market in China, the maintenance of a stable RMB exchange rate, and increased confidence among foreign investors in the RMB. Additionally, China should continue to open up its service sector and industry, as well as increase the opening of its service trade sector.

Item Type: Dissertation (University of Nottingham only)
Depositing User: Chen, Tingyu
Date Deposited: 20 Feb 2023 08:16
Last Modified: 20 Feb 2023 08:16

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