FDI’s Real Impact on Foreign Exchange Reserves: Evidence from China

Abstract

Most scholars believe that FDI inflow has a direct impact on China’s foreign exchange reserve, while others hold that FDI is mainly invested in the form of physical capital and technology, and therefore does not directly contribute to China’s foreign exchanges reserve accumulation. This paper points out that both effects, direct and indirect, should be considered when assessing FDI’s contribution to foreign exchange reserves. Result shows that from 1986 to 2007, FDI contributed 50% to foreign exchange reserves and the direct effect dominant before 2003 was surpassed by indirect effect after 2004 as the major source of the contribution.

Keywords: FDI, foreign exchange reserves, real effect