Exchange rate and Chinese Outward FDI

Applied Economics. 2016. Vol. 48. No. 51. P. 4961–4976.

Liu H. Y., Deseatnicov I.

Did the exchange rate (ER) regime change that was announced by the Chinese government in
2005 lead to an increased sensitivity of Chinese multinational companies (MNCs) to ER fluctua-
tions? To answer this question our article considers the effect of ER level, volatility and expecta-
tion on the Chinese outward foreign direct investment (OFDI) activities in 119 countries for a
period of 2003–2013. We find striking evidence that Chinese Renminbi appreciation has a
negative impact on Chinese outward FDI flows, and both higher ER volatility and expected
depreciation encourage Chinese outward FDI flows. We introduce two complementary effects
that explain these findings: repatriation effect and mercantilist effect. In view of the recent debate
about the growing importance of Chinese Renminbi in the international transactions we believe
that our research results shed light on the possible impact of ER policies on Chinese MNCs
behaviour and global FDI distribution.

Keywords: China, exchange rate, Foreign Direct Investment (FDI), multinational companies