The External Impact of China's Exchange Rate Policy: Evidence from Firm Level Data

33 Pages Posted: 16 Jul 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)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2011

Abstract

We examine the impact of renminbi revaluation on foreign firm valuations, considering two surprise announcements of changes in China’s exchange rate policy in 2005 and 2010 and employing data on some 6,000 firms in 44 economies. Stock returns rise with renminbi revaluation expectations. This reaction appears to reflect a combination of improvements in general market sentiment and specific trade effects. Expected renminbi appreciation has a positive effect on firms exporting to China but a negative impact on those providing inputs for the country’s processing exports. Stock prices rise for firms competing with China in their home market but fall for firms importing Chinese products with large imported-input content. There is also some evidence that expected renminbi appreciation reduces the valuation of financially-constrained firms, presumably because appreciation implies reduced Chinese purchases of foreign securities. The results carry over when we consider ten instances of market-perceived changes in prospective Chinese currency policy.

Suggested Citation

Eichengreen, Barry and Tong, Hui, The External Impact of China's Exchange Rate Policy: Evidence from Firm Level Data (July 2011). IMF Working Papers, Vol. , pp. 1-32, 2011. Available at SSRN: https://ssrn.com/abstract=1886906

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

International Monetary Fund (IMF) ( email )

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

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