China's Commercial Banks Exchange Rate Risk Management Study

As Chinese economy merges into global economy continuously, the economic communication between China and other countries is getting deeper and deeper, and the exchange rate issue becomes more and more important. Especially in recent years, China's foreign trade keeps high speed increasing status and foreign exchange reserves rises to the 1st place in the world. Because the risk caused by variety of exchange rate is more and more obvious, so it is inevitable that the commercial bank which as the principal part of market would face to the exchange rate risk. From June 21st, 2005, China has implemented the floating exchange rate system which based on the market supply and demand, adjusted by reference of a basket of currencies and well managed. After that, for the further promotion of development of foreign exchange market among banks, China had made a series of reform measures such as to expand the principal part range of instant foreign exchange trade, to introduce the enquiry trade way, to expand the forward exchange settlement and selling, to admit swap transaction, etc. For commercial bank, exchange rate risk will show up, and will increase as RMB forming mechanism gets more and more marketization.As economy globalization promoting rapidly today, the powerful defense of finance risk is one of important measures to ensure national financial and economic security. Meanwhile, as the continuous reform of commercial bank system, China paid much attention on the risk measurement and management, defending competence and measures and risk management system. But in the long period, the stable RMB exchange rate made the state-own commercial banks paid less attention on exchange rate risk and lacked of managing experiences. The evident shortage compare to the foreign advanced banks need to be improved so as to apply the variety of the market environment. So improving the exchange rate risk management has become the issue which should be paid much more attention by Chinese commercial banks.Several financial crises in the history warned us that we have to pay much attention on exchange rate risk. Commercial banks must improve the managing capability to exchange rate so as to keep their stable business running and healthy development. How to make effective countermeasure for exchange rate risk management is become an important research subject.The paper involves 4 parts:The 1st part has mainly introduced the background of exchange rate risk which Chinese commercial banks faced, and summarized the research status of exchange rate risk management of commercial banks in and out of China.The 2nd part has mainly summarized the relative theories of exchange rate and exchange rate risk, analyzed the effect of exchange rate to commercial banks, and introduced the ways of identification and assessment to exchange rate.The 3rd part has reviewed the developing course of Chinese exchange rate system. And according to the annual data of recent 3 years of 14 Chinese listed commercial banks, using the analytic way mentioned in the 2nd part to find out the problems in exchange rate risk management of Chinese commercial banks.The 4th part has analyzed the problems mentioned in the 3 rd part from 2 aspects included commercial bank itself and outside the bank, and made suggestion for improving exchange rate risk management of Chinese commercial banks.