...growth. A number of important issues that may underlay China's economy imbalance are discussed, and it is suggested that current account surpluses and FDI remain important contributors to the foreign exchange reserve accumulation. Using empirical methodology analysis, the relationships and interactions between FDI, REER and Gross Domestic Product (GDP) in China in the long-run is shown, which yield additional information about implications for the behaviors of REER and FDI in the Chinese economy.

Introduction

Over the last ten years, China's Balance of Payment (BOP) kept its current and capital accounts continuously in surplus. In the first half of 2005, the BOP continued "a double surplus", and the key items of the BOP reflected the past development situation, whose trade scale continued to keep up with the very quick growth. From 1982 to 2004, the annual total scale of the Balance of Payment accounts' increased by 31.6%, rising to US $1.91 trillion from US $0.054 trillion, which caused the percentage of the BOP by GDP to rise from 19% to 115%. In the first half of 2005, the Balance of Payment traded a total scale of US $1.14 trillion. This is an increase of 25.3% over the year. This shows that China's openness goes much further, and integration with the outside world is occurring much faster.

The market-oriented economy can allocate resources to bring it to the points where they make higher profits, in order to realize the resources' optimal allocation. In the course of the Chinese market economy's construction, China's economy has emerged as a great structure along with the progress of opening policy, which can be reflected in the country's Balance of Payment structure, and this kind of structural change in turn affects China's outward economic development. So the changes of China's BOP structure must be taken into considerations, and related strategies and policies of foreign capital usage should be adjusted.

The paper is divided into the following sections. Section II starts with defining the concept of "impossible trinity" in policy making, and then examines the accumulation of China's international reserves. A key finding is that the current account surpluses and FDI have remained important contributors to reserve accumulation. This section then presents a detailed picture of the Foreign Direct Investment (FDI) in China. China's capital inflows have generally been dominated by FDI, which constitutes a preferred form of inflows since FDI tends to be stable and associated with other benefits such as transfers of technological and managerial expertise.

Section III gives an analysis framework that contains the economic condition for both internal equilibrium and external equilibrium. In this framework, one can select different policy instruments, such as interest rates and foreign exchange rates, to make a policy combination, which can help in adopting measures that would fulfill the specific policy objectives. The relationship between FDI and current account (CA) in China is presented, along with the impact of the exchange rate on FDI and the Balassa-Samuelson effect. Then a detailed description of the Real Effective Exchange Rate (REER) is presented, which will be a very important variable in the analysis of the next section.

Section IV shows the data analysis and empirical methodology to testify the relationships and interactions among FDI, REER and GDP in China. In this section, the co-integration test is used as an econometric measure, which can help in finding the implications for the behaviors of REER and FDI in the economy. The co-integration equation between FDI, REER and GDP...

NOTE: All illustrations and photos have been removed from this article.



More articles from Journal of Comparative International Management
Relationship between job satisfaction and business excellence: empiric..., December 01, 2006

Looking for additional articles?
Search our database of over 3 million articles.

Looking for more in-depth information on this industry?
Search our complete database of Industry & Market reports by text, subject, publication name or publication date.

About Goliath
Whether you're looking for sales prospects, competitive information, company analysis or best practices in managing your organization, Goliath can help you meet your business needs.

Our extensive business information databases empower business professionals with both the breadth and depth of credible, authoritative information they need to support their business goals. Whether it be strategic planning, sales prospecting, company research or defining management best practices - Goliath is your leading source for accurate information.