Exploring the Relationships among Exchange Rate, Foreign Investment and Economic Growth Using Time Series Econometric Approaches: The Case of China’s Guangdong Province

Abstract

As the Chinese government has been trying to promote the Belt and Road Initiatives and enhance the openness of its economic development, it is important to study and understand the depreciation/appreciation mechanism of Chinese yuan (CNY), especially how this affects or is affected by some key economic growth and openness measures like gross domestic product (GDP) and foreign direct investment (FDI). This paper is just to examine the short-run dynamics and long-run equilibrium relationships among the three important macroeconomic time series of CNY exchange rate, FDI and GDP. Twenty-year annual data from 1996 to 2015 for the top ten cities (in terms of GDP) in Guangdong, one of the economically influential provinces in China, are specifically collected for the study. The panel unit-root test, Johansen-Fisher cointegration test, Granger causality test, and vector autoregression (VAR) model are applied to analyze the data for exploring long-run relationships. Vector error correction (VEC) model and block exogeneity Wald test are also adopted to examine the short-run dynamics. Key research results include that, there is a long-run cointegration relationship among exchange rate, FDI and GDP, FDI and GDP are the long-run Granger causes of exchange rate such that FDI positively affects exchange rate whle GDP negatively influence exchange rate, and FDI is also the short-run Granger cause of exchange rate but the short-run relationship is negative. Discussions, and policy implications and future research directions are presented finally.