Analysis on the Dynamic Causality Relationships among FDI, Foreign Trade and Exchange Rate Volatility

China reform the RMB exchange rate formation mechanism, which result in Chinese enterprises facing exchange rate risk. Chinese rapid economic growth is accompanied by rapid growth in exports and foreign direct investment(FDI). This paper attempts to exam the relation between FDI and trade export and exchange rate volatility in China by vector autoregressive model and Granger causal test. The empirical analysis reveals that a causal complementary relationship exists among the three variables. Also, an depreciation of the RMB/USD currency (effect exchange rate rising) led to improvement in export trade, which is satisfied with the Marshall-Lerner condition. FDI improves trade balance, but the impact of FDI on trade exports is insignificant. The appreciation of RMB will not deteriorate the trade account. Some policy suggestions on promoting the growth of China´s foreign trade through foreign investment and exchange rate reform, such as: improving the RMB exchange rate formation mechanism, strengthening research and development efforts of the independent intellectual property rights, increasing the quality of foreign investment and value-added products.