The Impact of FDI on China’s Current Account in the Balance of Payments

Abstract : By examining t he characteristics of China’s current account structure and the channels that FDI may influence it , this paper presents a rigorous analysis of the impact of FDI on the changes of China’s current account balance in the balance of payment s. The results of variance decomposition analysis reveal that FDI is a significant contributing factor to t he current account balance , which , from 1982 to 2006 , constituted a fluctuation of approximately fourteen percent .In addition , FDI has conflicting influences on the current account balance. On one hand , FDI contributes to China’s trade surplus by driving growth in manufacturing and related sectors ,constituting an increase in current account balance and hence t he balance of payment s. On the other hand , remitted interest s from FDI consequently result in continued deficit s to investment income , which will partially off set t he positive effect s of trade balance at the same time. Hence , both aspect s must be taken into consideration when making adjustment s to t he China’s international balance of payment s featuring t he Twin Surpluses ( surpluses in both current account and capital account) . Only through a holistic assessment of t he interaction between two account s and t he interaction between foreign investment policy and foreign trade policy can the purpose of sustainable growth of economy be achieved.