The Impact of Chinese Exchange Rate Policy on Global Stock Markets: Evidence from Firm-Level Data

Abstract

This paper examines the impact of renminbi revaluation on foreign firm valuation and, by implication, firm prospects. To deal with the potential endogeneity of exchange rate movements, we consider not just official announcements of exchange rate policy but also 27 instances of market-perceived changes in China’s currency policy driven by domestic or foreign political pressure. Using information on 12,300 firms in 44 countries, we find that stock returns increased with renminbi revaluation expectations. This reaction was related as much to improved market sentiment as to specific trade channels, however. In terms of trade channels, we find that expectations of renminbi appreciation reduce the relative stock returns of firms providing components and raw materials to China as inputs for the country’s exports. There is also some evidence that expectations of renminbi appreciation reduce the stock prices of financially-constrained firms.

Keywords: Chinese Exchange Rate Policy, Global Stock Markets

JEL Classification: G1, F3