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This paper studies the dynamic relationship of China's inward and outward foreign direct investments (FDI). It first identifies the key determinants of China's outward FDI (OFDI) in 172 host countries during 2003-09 using a partial stock adjustment model. It finds strong evidence of dynamic adjustment in China's OFDI stock with an agglomeration effect.The dynamic adjustment and agglomeration effects are stronger in "high-tech" countries than in "low-tech" ones but indifferent in host country's resource endowments and income levels.The empirical results suggest that there exists a substantial adjustment cost in China's OFDI and that China's existing OFDI stock can gradually adjust towards its long term equilibrium level, which is not only greater but also more volatile than the actual stock. Of particular interest is that we find a strong and positive relationship between lagged inward FDI (IFDI) and contemporaneous OFDI, implying that capital outflow from China has been partially induced by the countries which have invested in China.

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This paper studies China's stock market with respect to financial liberalization and international market interdependence after its accession to the WTO in 2001. Using the multifactor R-squared measure, we derive a normalized index to measure the impact of financial liberalization policies on stock market interdependence between China and the world. Some of China's financial liberalization measures, such as QFII and exchange rate reform, are found to have played an important role in increasing market interdependence. After the US credit crunch in 2007 and the world financial crisis in the following years, some anomalies were observed as China's stock market was more interdependent of the global market than the US stock market in some specific periods. These anomalies may have been related to the former's overreaction and economic overheating.JEL: C22, C38, F36, G15, G18