The foreign exchange exposure of Chinese banks

Abstract

Using the capital market approach and the equity price data of 14 listed Chinese banks, this empirical study finds that there is a positive relationship between bank size and foreign exchange exposure. This relationship may reflect the larger foreign exchange operations and trading positions of larger Chinese banks and their significant indirect foreign exchange exposure arising from impacts of the renminbi exchange rate movements on their customers. Empirical evidence also suggests that the average foreign exchange exposures of state-owned and joint-stock commercial banks in China are higher than those of banks in Hong Kong, notwithstanding their limited participation in international banking businesses compared with their Hong Kong counterparts. It is also found that negative foreign exchange exposure is prevalent for larger Chinese banks, suggesting that an appreciation of the renminbi tends to reduce their equity value. It is therefore likely that the banking sector's performance will be hampered. Together with the fact that decreases in equity values generally imply a higher default risk, the effects of different scenarios of renminbi appreciation on the default risk of Chinese banks should therefore be closely monitored.

Exchange Rate fluctuations and Financial Performance of Banks: Evidence from Sudan

“…Razi et al (2012) noted that magnitude of foreign direct investment may affect the extent and direction of association between exchange rare and bank profitability. Also bank size has been cited by Wong et al (2009) as a determinant of the direction of the sigh of the relationship between foreign exchange and bank profitability.…”

Bank Risk Factors and Changing Risk Exposures in the Pre- and Post-financial Crisis Periods: An Empirical Study for India

“…The findings indicate that large banks have higher interest rate risks with all banks exposed to market risk. Wong, Wong and Leung (2009) examine exchange rate exposure of 14 Chinese banks for the period [2005][2006][2007][2008] and found that almost half of Chinese listed banks had significant exchange rate risk exposure, with large banks more exposed. Kasman, Vardar and Tunç (2011) analyse 13 Turkish banks' interest rate and exchange rate risk exposures for the period from 27 July 1999 to 9 April 2009, using OLS (Ordinary Least Squares) and GARCH estimation models.…”

Derivative activities and Chinese banks’ exposures to exchange rate and interest rate movements

“…Thus, our approach generates a much stronger association between banks' stock returns and exchange rate changes than previous studies in the literature (see, for example, Choi and Elyasiani 1997;Au Yong et al 2009;Wong et al 2009). Furthermore, we show that Chinese banks are exposed linearly and nonlinearly to the interest rate movement and these exposures are more pronounced following the orthogonalisation of market returns.…”

“…Banks' exposure to foreign exchange and interest rate fluctuations is commonly estimated using an asset-pricing model of the following form (see, for example, Choi et al 1992;Choi and Elyasiani 1997;Wong et al 2009) R , is the aggregation of the individual stocks traded in a given market, the market portfolio is also exposed to foreign exchange and interest rate fluctuations (Priestley and Odegaard 2007). Thus, the coefficients FX i  , and I i  in Equation (1) do not measure the bank i's total exposure to the foreign exchange and interest rate movements, but they rather capture the exposure over and above that of the market portfolio.…”