chapter  8
13 Pages

Influence of FDI on the financial stability of China

ByPAN SU-KUN

China has absorbed a lot of foreign direct investment (FDI) in the last few years. FDI flowing to China is drawn by abundant labour resources and preferential opening-up policies. Actual FDI in China hit $63 billion in 2006, reflecting a slight increase of 5 percent from a year earlier, with the service sector becoming a new hotspot. On the one hand, FDI has made an enormous contribution to the Chinese economy. To some extent, the dazzling growth of exports was also the result of booming FDI in China. China’s trade surplus widened to a record $177.5 billion in 2006, representing an increase of 74 percent from a year earlier. Exports rose 27 percent year-onyear to $969 billion in 2006, while imports climbed 20 percent to $791.6 billion.2 On the other hand, FDI has also brought pressure to the financial stability of China. As FDI flows into China, the appreciation pressure on the RMB has gradually accumulated. The Central Bank of China implemented a managed floating RMB exchange rate mechanism on July 21, 2005, which is based on market supply and demand and is adjusted in relation to a basket of major foreign currencies. In 2007, RMB appreciated by more than 6 percent against the US dollar.3 Although we should reform the mechanism of RMB, faster appreciation of the currency in the short term would be bad for the Chinese economy. So it is important to study the influence of FDI on the financial stability of China in order to find feasible measures with which to face the tough situation in the Chinese economy.