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Most of the study of causal relationship of GDP or growth with Trade and Foreign Direct Investment in the context of China rely on cross country comparisons, or simple correlations/regressions disregarding nonstationarity properties, or at most on VAR or VECM or Johansen-Juselius cointegration technique of testing for Granger causality. The potential biases, pitfalls, influence of nuisance parameters and asymptotic unreliability of these techniques have been well documented in the literature and also briefly mentioned in this paper. Therefore, this paper employs the more recent and robust Toda-Yamamoto-Dolado-Lutkephol Augmented VAR(p) technique for testing Granger causality among four time series variables. This technique has been shown to provide more robust and asymptotically reliable results under wide variety of situations regarding the cointegration relationships among the time series. This study focuses on the post liberalization period and the results strongly support both Export-led and foreign-Direct- Investment-led Growth in China. Imports, however, do not have direct Granger causality towards GDP, but certainly influence it through the indirect channel of influencing Exports and Foreign direct Investment. [ABSTRACT FROM AUTHOR]

Our study develops two propositions for establishing the superiority of a flexible exchange rate system over a fixed one. These propositions require one of the two following conditions: a) either purchasing power parity holds between two countries, or b) the output target of the reference country is adjusted to its long-run value and its real exchange rate is lower than the long-run value. Our analysis on China shows that neither of these conditions is satisfied. Therefore, we conclude that in case of China the conditions for the superiority of flexible exchange rate system are not fulfilled. As such, China's decision to peg its currency with U.S. dollar cannot be considered to be irrational. This paper devotes itself to analyzing the effect of the violation of PPP along with the deviation of output target and real exchange rate from their long-run equilibrium values on government's loss function. [ABSTRACT FROM AUTHOR]