The relationship between FDI and foreign exchange reserve and its underlying causes

This paper applies Co integration analysis and Granger causality test to obtain the relationship between FDI and foreign exchange reserve, using the annual data from 1982 to 2008. The empirical result indicates that there exists a long-run equilibrium tendency and significant bi-directional Granger causality between China' FER and its FDI. With further analysis, we know that a capital flow collateral relationship and financing mechanisms of U.S. current account exist between China and America.