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

33 Pages Posted: 14 Mar 2011

See all articles by Barry Eichengreen

Barry Eichengreen

University of California, Berkeley; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Hui Tong

International Monetary Fund (IMF)

Date Written: March 12, 2011

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

Suggested Citation

Eichengreen, Barry and Tong, Hui, The Impact of Chinese Exchange Rate Policy on Global Stock Markets: Evidence from Firm-Level Data (March 12, 2011). Available at SSRN: https://ssrn.com/abstract=1784503 or http://dx.doi.org/10.2139/ssrn.1784503

Barry Eichengreen

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Hui Tong (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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