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Does policy uncertainty affect firms' exchange rate exposure? Evidence from China11

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  • He, Qing
  • Liang, Bailin
  • Zhang, Ce

Abstract

Analyzing data from 3616 Chinese listed firms, we find a strong positive relationship between policy uncertainty and firms' exchange rate exposure. This result remains robust after controlling for macroeconomic conditions and addressing endogeneity issues. Notably, policy uncertainty's impact is significantly stronger for firms with a higher degree of international involvement and for poorly-governed firms. Interestingly, firms use financial hedging more intensively and reduce their operational hedging in high-uncertainty periods. Our results suggest that policy uncertainty exacerbates the impact of currency movements on firms' financial performance, as firms become increasingly involved in international operations. Consequently, firms should strengthen their corporate governance and make effective use of hedging tools.

Suggested Citation

  • He, Qing & Liang, Bailin & Zhang, Ce, 2026. "Does policy uncertainty affect firms' exchange rate exposure? Evidence from China11," China Economic Review, Elsevier, vol. 95(C).
    • Handle: RePEc:eee:chieco:v:95:y:2026:i:c:s1043951x25002573
    DOI: 10.1016/j.chieco.2025.102599
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    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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