Research On The Exchange Rate Exposure Of Chinese Exporting And Importing Listed Firms

The breakdown of Bretton Woods fixed-party system in the early1970s led the volatilityof exchange rates to become an increasingly important source of risk for a firm. From2005tonowadays, Chinese Exchange rate regime reform has already been through seven years. Untilnow, although Chinese firms gradually realize that exchange rate fluctuating is a normalphenomenon in business world, but most of them do not pay more attention on exchange raterisk management. Firm is defined as “exposed” to exchange rate risk if its values or profitsare correlated with changes in currency values.In this paper, firstly we expand the theoretical models to examine the exposure ofcurrency risk of an exporting firm that can compete and produce in both a foreign and localmarket and generate exposure as a function of market share, product substitutability,pass-through, sales and costs in foreign currency. What’s more, to focus on the relationshipbetween Chinese firms’ exposure and costs and facilitate relative analysis, our paperestablishes a specific model of exposure that, under price competition, provides all relevantfactors.Secondly, this paper examines the nature and the economic significance of the exchangerate to value of645Chinese exporting and importing listed firms in14treaded industries,using a database of Chinese capital market. Here, our main contribution is to find out thatthere is no “exchange rate exposure puzzle” in China. And this paper applies a conditionalasset-pricing model with time-varying parameters to China’s ten industries, we find that allindustries have a significant currency premium, and find that exchange rate changes maycause a greater short-term sensitivity of traded industries. Furthermore, for an industry with apositive mean currency beta, a positive product of the currency beta and the factor expectationimplies a higher expected currency risk premium. Also, this paper examines the nature of timevarying betas of the exchange rate volatility to firms’ value using the same database of14traded industries. Our main contribution is to apply a dynamic asset pricing model withemerging market characteristics, such as market speculation or investor sentiment, to priceboth developed and developing countries’ currency risks. Also we find out exposure changeswith different exchange rate policy. Furthermore, the formation mechanism of exchange rateexposure has been discussed theoretically. The results indicates different currency risks andpolicies have a significant impact on currency exposure and shows evidence that the decisivefactors gotten from above discussion have significant influence in the empirical analysis ofexposure of China’ traded firms. This paper systematically examines the short-run and long run effects of exchange ratemovements on four types of cash flows in a sample of104Chinese manufacturing firms infive industries and empirically tests the firm-level determinants of exposure estimates. Ouranalysis leads to the conclusion that the short-term and long-term impacts of exchange ratefluctuations on total cash flow of export-oriented firms are significant and the impacts aremostly negative. Furthermore, operational cash flows is more sensitive to the short-run impactof exchange rate movements; as for financial and investment cash flows, they have moreclosely relationship to the long-run exchange rate shocks. Some firm-level decisive factorshave significant influence on exposure.Finally, our studies have examined the exposure model with various determinants, forexample, market share, product substitutability, pass-through, sales and costs in foreigncurrency. In our empirical tests, we can see that as to a firm who has weak market and pricingpower, the better methods of mitigating exchange rate exposure are reducing production costsand using reasonable operational strategies for hedging.