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Why is China so attractive for FDI? The role of exchange rates

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  • XING, Yuqing

Abstract

This paper argues that China's exchange policy plays a critical role in its FDI boom. Yuan's devaluation and the pegging yuan to the dollar policy not only offset the pressure of rising real wage due to sustained economic growth in the last two decades, but also improved China's competitiveness in attracting global FDI. Examining the hypothesis in the context of Japanese FDI in China's nine manufacturing sectors from 1981 to 2001, the paper finds a strong correlation between Japanese direct investment in China and the real bilateral exchange rate between yen and yuan. Empirical evidences strongly suggest that China's exchange rate policy is one of critical factors driving FDI into China.

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Bibliographic Info

Article provided by Elsevier in its journal China Economic Review.

Volume (Year): 17 (2006)
Issue (Month): 2 ()
Pages: 198-209

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Handle: RePEc:eee:chieco:v:17:y:2006:i:2:p:198-209

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Web page: http://www.elsevier.com/locate/chieco

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Citations

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Cited by:
  1. Busse, Matthias & Hefeker, Carsten & Nelgen, Signe, 2010. "Foreign direct investment and exchange rate regimes," HWWI Research Papers 2-17, Hamburg Institute of International Economics (HWWI).
  2. Yuqing Xing, 2006. "Exchange Rate Policy and the Relative Distribution of FDI between Host Countries," Working Papers, Research Institute, International University of Japan EMS_2006_10, Research Institute, International University of Japan.
  3. Henry Aray & Javier Gardeazabal, 2008. "Going Multinational under Exchange Rate Uncertainty," ThE Papers, Department of Economic Theory and Economic History of the University of Granada. 08/19, Department of Economic Theory and Economic History of the University of Granada..
  4. Nagubadi, Rao V. & Zhang, Daowei, 2011. "Bilateral foreign direct investment in forest industry between the U.S. and Canada," Forest Policy and Economics, Elsevier, Elsevier, vol. 13(5), pages 338-344, June.
  5. Liao, Wei & Shi, Kang & Zhang, Zhiwei, 2012. "Vertical trade and China's export dynamics," China Economic Review, Elsevier, Elsevier, vol. 23(4), pages 763-775.
  6. Zhang, Yanbing & Hua, Xiuping & Zhao, Liang, 2011. "Monetary policy and housing prices; a case study of Chinese experience in 1999-2010," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 17/2011, Bank of Finland, Institute for Economies in Transition.
  7. Yuqing Xing, 2008. "FDI in China: Facts and Impacts on China and the World Economy," Working Papers, Research Institute, International University of Japan EMS_2008_03, Research Institute, International University of Japan.
  8. Jingliang Xiao & Glyn Wittwer, 2009. "Will an Appreciation of the Renminbi Rebalance the Global Economy? A Dynamic Financial CGE Analysis," Centre of Policy Studies/IMPACT Centre Working Papers g-192, Victoria University, Centre of Policy Studies/IMPACT Centre.
  9. Nguyen Thanh Xuan & Yuqing Xing, 2006. "Foreign Direct Investment and Exports: the Experiences of Vietnam," Working Papers, Research Institute, International University of Japan EMS_2006_13, Research Institute, International University of Japan.

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