The Impact Of RMB Appreciation On China's Stock Market: An Industry Level Analysis

The objective of this study is to examine the impact of foreign exchange fluctuation on stock returns at an industry level in both U.S. and China. I provide theoretical argument for the current situation and reasons for RMB appreciation and then discuss the impact of the RMB appreciation on 10 industries in the first part. In the second part, this thesis quantitatively analyzes the sensitivity to foreign exchange of equity returns in different industries in China's stock market and compares the sensitivity with that in the U.S. stock market. The Ordinary Least Squares (OLS) Regression models are applied in estimation with a control factor of relevant stock market movements. In the last part, I examine the Chinese Yuan NDF and sub period effects using OLS regression models and discuss different outcome in China and in U.S. stock market.Empirical results show that the effects of foreign exchange movement on stock market returns are different in the U.S. and in the Chinese market. Movement in one-month-out CNY NDF can more likely represent foreign exchange fluctuation than the USD-CNY spot rate due to Chinese monetary policies. A long run causal relationship exists between the stock return and foreign exchange movement; however, short run effects of foreign exchange movement on China and U.S stock market are nearly non-existent.