The Foreign Exchange Exposure of Chinese Banks

Eric Wong, Jim Wong and Phyllis Leung
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Eric Wong: Research Department, Hong Kong Monetary Authority
Jim Wong: Research Department, Hong Kong Monetary Authority
Phyllis Leung: Research Department, Hong Kong Monetary Authority

No 807, Working Papers from Hong Kong Monetary Authority

Abstract: Using the Capital Market Approach and 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, which may reflect 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 that their participation in international banking businesses is still limited 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 values, and is therefore likely to hamper the banking sector¡¦s performance. Together with the fact that decreases in equity values generally imply higher default risk, how Chinese banks would be affected under different scenarios of renminbi appreciation should be closely monitored.

Keywords: Foreign exchange exposure; banking; China (search for similar items in EconPapers)
JEL-codes: E58 F31 G21 G28 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2008-06
New Economics Papers: this item is included in nep-ban, nep-cna and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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