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The foreign exchange exposure of Chinese banks

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  • Wong, Tak-Chuen
  • Wong, Jim
  • Leung, Phyllis
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    Abstract

    Using the capital market approach and the equity price data of 14 listed Chinese banks, this empirical study finds that there is a positive relationship between bank size and foreign exchange exposure. This relationship may reflect the larger foreign exchange operations and trading positions of larger Chinese banks and their significant indirect foreign exchange exposure arising from impacts of the renminbi exchange rate movements on their customers. Empirical evidence also suggests that the average foreign exchange exposures of state-owned and joint-stock commercial banks in China are higher than those of banks in Hong Kong, notwithstanding their limited participation in international banking businesses compared with their Hong Kong counterparts. It is also found that negative foreign exchange exposure is prevalent for larger Chinese banks, suggesting that an appreciation of the renminbi tends to reduce their equity value. It is therefore likely that the banking sector's performance will be hampered. Together with the fact that decreases in equity values generally imply a higher default risk, the effects of different scenarios of renminbi appreciation on the default risk of Chinese banks should therefore be closely monitored.

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    Bibliographic Info

    Article provided by Elsevier in its journal China Economic Review.

    Volume (Year): 20 (2009)
    Issue (Month): 2 (June)
    Pages: 174-182

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    Handle: RePEc:eee:chieco:v:20:y:2009:i:2:p:174-182

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    Web page: http://www.elsevier.com/locate/chieco

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    Keywords: Foreign exchange policy Foreign exchange risk Banking China;

    References

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    Cited by:
    1. Sunghee Choi, 2010. "Estimating Exchange Rate Exposure of Trade-intensive Firms: Application to Korean Oil-refiners and Petrochemicals," Global Economic Review, Taylor & Francis Journals, vol. 39(3), pages 327-348.

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