The Foreign Exchange Exposure of Chinese Banks

Posted: 1 Mar 2011

See all articles by T. C. Wong

T. C. Wong

Hong Kong Monetary Authority - Research Department

Jim Wong

Hong Kong Monetary Authority

Phyllis Leung

Hong Kong Monetary Authority - Research Department

Multiple version iconThere are 2 versions of this paper

Date Written: March 16, 2009

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.

Keywords: Foreign exchange policy, Foreign exchange risk, Banking, China

JEL Classification: E58, F31, G21, G28

Suggested Citation

Wong, Tak-Chuen and Wong, Jim and Leung, Phyllis, The Foreign Exchange Exposure of Chinese Banks (March 16, 2009). China Economic Review, Vol. 20, No. 2, 2009. Available at SSRN: https://ssrn.com/abstract=1772528

Tak-Chuen Wong (Contact Author)

Hong Kong Monetary Authority - Research Department ( email )

55/F, Two International Finance Centre,
8 Finance Street, Central,
Hong Kong
Hong Kong

Jim Wong

Hong Kong Monetary Authority ( email )

3 Garden Road, 30th Floor
Hong Kong
Hong Kong

Phyllis Leung

Hong Kong Monetary Authority - Research Department ( email )

3 Garden Road, 30th Floor
Hong Kong
China

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