Currency Exposure in China Under the New Exchange Rate Regime: National Level Evidence

13 Pages Posted: 15 May 2015

See all articles by Jing Nie

Jing Nie

University of International Business and Economics (UIBE); Durham Business School

Zhichao Zhang

Durham University - Durham Business School

Zhuang Zhang

University of Southampton - Southampton Business School

Si Zhou

Shanghai University; Xi'an Jiaotong-Liverpool University

Date Written: May–June 2015

Abstract

The present paper studies China's national level currency exposure since 2005 when the country adopted a new exchange rate regime allowing the renminbi (RMB) to move towards greater flexibility. Using generalized autoregressive conditional heteroskedastic and constant conditional correlation‐generalized autoregressive conditional heteroskedastic methods to estimate the augmented capital asset pricing models with orthogonalized stock returns, we find that China equity indexes are significantly exposed to exchange rate movements. In a static setting, there is strong sensitivity of stock returns to movements of China's tradeweighted exchange rate, and to the bilateral exchange rates except the RMB/dollar rate. However, in a dynamic framework, exposure to all the bilateral currency pairs under examination is significant. The results indicate that under the new exchange rate regime, China's gradualist approach to moving towards greater exchange rate flexibility has managed to keep exposure to a moderate level. However, we find evidence that in a dynamic setting, the exposure of the RMB to the dollar and other major currencies is significant. For China, the challenge of managing currency risk exposure is looming greater.

Keywords: capital asset pricing models, exchange rate regime, currency exposure, generalized autoregressive conditional heteroskedastic modeling

JEL Classification: G3, F4, E3

Suggested Citation

Nie, Jing and Zhang, Zhichao and Zhang, Zhuang and Zhou, Si, Currency Exposure in China Under the New Exchange Rate Regime: National Level Evidence (May–June 2015). China & World Economy, Vol. 23, Issue 3, pp. 97-109, 2015, Available at SSRN: https://ssrn.com/abstract=2606435 or http://dx.doi.org/10.1111/cwe.12116

Jing Nie (Contact Author)

University of International Business and Economics (UIBE) ( email )

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

Durham Business School ( email )

Mill Hill Lane
Durham, DH1 3LB
United Kingdom

HOME PAGE: http://https://sites.google.com/site/jingnie89/

Zhichao Zhang

Durham University - Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Zhuang Zhang

University of Southampton - Southampton Business School ( email )

Southampton, SO17 1BJ
United Kingdom

Si Zhou

Shanghai University ( email )

Room 522, Building 1,
Shanghai University,
Shanghai, Shanghai 20044
China

Xi'an Jiaotong-Liverpool University ( email )

International Business School Suzhou
Suzhou, Jiangsu
China

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