The External Impact of China'S Exchange Rate Policy: Evidence From Firm Level Data
IMF Working Papers, July 1, 2011
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- The External Impact of China'S Exchange Rate Policy: Evidence From Firm Level Data
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Bibliographic details
- Authors: Barry J. Eichengreen, Hui Tong
- Published: July 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455290680.001
Research question and data
- Research focus: impact of renminbi revaluation on foreign firm valuations.
- Events analyzed: two surprise announcements of changes in China’s exchange rate policy in 2005 and 2010.
- Sample: data on some 6,000 firms in 44 economies.
- Additional tests: ten instances of market-perceived changes in prospective Chinese currency policy.
Main empirical findings
- Stock returns rise with renminbi revaluation expectations.
- Expected renminbi appreciation:
- has a positive effect on firms exporting to China.
- has a negative impact on firms providing inputs for China’s processing exports.
- leads to stock price increases for firms competing with China in their home market.
- leads to stock price decreases for firms importing Chinese products with large imported-input content.
- There is some evidence that expected renminbi appreciation reduces the valuation of financially-constrained firms, presumably because appreciation implies reduced Chinese purchases of foreign securities.
- Key repetition: results carry over when considering ten instances of market-perceived changes in prospective Chinese currency policy.
Interpretation and mechanisms
- Findings reflect a combination of:
- improvements in general market sentiment following renminbi revaluation expectations; and
- specific trade effects stemming from changes in relative prices and trade flows.
- Financial channel: expected appreciation may reduce demand for foreign securities from Chinese investors, adversely affecting financially-constrained firms.
Subjects and keywords (topical scope)
- Subjects: Currencies, Exchange rates, Exports, Financial institutions, Foreign exchange, Imports, International trade, Money, Stocks.
- Keywords: China; China's processing; Currencies; exchange rate; Exchange rates; Exports; exports to China; external impact; firm; Global; Imports; imports from China; market beta; processing export; renminbi appreciation; stock market; Stocks; WP.