Foreign Currency Denominated Debt And Corporate Investment

Since the RMB exchange rate reform in the July of 2005,with the continuous appreciation of RMB,Chinese companies have borrowed a large amount of foreign currency denominated debt.Unlike local currency debt,foreign currency denominated debt is greatly affected by the exchange rate fluctuation.After 2014,RMB stopped the long-term unilateral appreciation against US dollar,and gradually entered the devaluation channel.On August 11,2015,the People's Bank of China adjusted the RMB middle price mechanism,which triggered a sharp drop in the value of RMB against USD.Under the background of highly foreign currency denominated debt financing,enterprise deleveraging,intensification of RMB exchange rate volatility and the dollar interest rate increase,the economic consequences of foreign currency denominated debt on enterprise investment are worth further study.This paper first examines the economic consequences of foreign currency denominated debt on corporate investment in China by taking advantage of the currency structure of financial liabilities and other related data in 2013-2016 annual reports of 715 Chinese listed companies from the perspective of RMB depreciation.It is found that foreign currency denominated debt is significantly negatively related to corporate investment under the condition of RMB devaluation.Further more,the income statement effect is weak,and the balance sheet effect is dominant.Considering the debt maturity structure,it is found that the negative relationship between short-term foreign currency denominated debt and corporate investment is more significant under the condition of RMB devaluation.In addition,in the case of RMB devaluation,the relationship between foreign currency denominated debt and corporate investment is significantly negative among the companies not using natural hedges and foreign exchange derivatives while not significantly negative among the companies using natural hedges and foreign exchange derivatives,which shows that natural hedges and the use of foreign exchange derivatives can weaken the negative impacts of foreign currency denominated debt on corporate investment and play an important role in foreign exchange risk management.This paper first studies the impacts of foreign currency denominated debt on corporate investment in China,which fills the domestic gap in this field,expands financing theories and debt heterogeneity literature in currency structure,provides empirical support for further research on debt heterogeneity,and enriches firm-level researches about the influence of foreign currency denominated debt in China,and also expands the perspective of the study on microcosmic effects of RMB exchange rate.Based on the gradual reform of RMB exchange rate,this paper also complements current academic researches on the background of the sudden monetary or financial crisis in developing countries.In addition,this study can provide advice for enterprises in investing and financing decisions,foreign exchange risk management and so on,and can provide some important implications for policy making.