The Foreign Exchange Exposure Of Chinese Listed Banks

For China’s banking sector, the growing internationalization of Chinese banks in boththeir fundraising activities and banking businesses and the lack of financialinstruments available in the local market for Chinese banks to hedge their foreignexchange risk, together with the structural change in China’s exchange rate regime inJuly2005, may suggest that Chinese banks in general have become increasinglyexposed to foreign exchange risk. At the same time, the trend of financialglobalization and blended banking system force executives step up efforts to establishmore and more overseas’ branches. Given this situation, a comprehensive empiricalstudy on the foreign exchange exposure of Chinese banks could provide usefulinsights for both exchange rate and banking policies in China.After summarizing the research literature of home and abroad, this paper firstqualitatively analysis the definition and classification of foreign exchange exposure,and emphatically introduce two kinds of main methods of quantitative analysis: CashFlow Approach and Capital Market Approach. Respectively, we use the capital marketapproach and the equity price data of16listed Chinese banks in the Chinese stockmarket, and the cash flow approach and the operating income data of14listedChinese banks in the Chinese stock market, using Panel Data Model, considering lagfactors, to measure the foreign exchange exposure of Chinese banking industry inquantitative way.Empirical evidence suggests that the listed Chinese banks are generally exposure toforeign exchange risk when considering the lag effects, not matter using the capitalmarket approach or using the cash flow approach. The result also suggests that thefluctuation of different bilateral exchange rates has different influence on the value oflisted Chinese banks. Together with the fact that decreases in equity values generallyimply a higher default risk, the effects of different scenarios of RMB appreciation onthe default risk of Chinese banks should therefore be closely monitored. At the sametime, this paper also found out that the empirical result obtained from Cash FlowApproach accord closer with the practical situation.