Exchange rate exposure and its determinants in China

Abstract

This paper investigates the foreign exchange rate exposure and its determinants using the data of all firms listed on the Chinese stock market from 2005 to 2018. We find significantly linear and nonlinear exposures to bilateral as well as multilateral foreign exchange rates. Our temporal study also shows that considerably more Chinese firms were exposed to exchange rate fluctuations after the major exchange rate reform in 2015. We find a negligible role played by international operations of firms in explaining exposures. The level of exchange rate exposure is primarily explained by variables that are proxies for a firm's hedging costs. Larger firms, or firms with less leverage ratio, tend to have smaller exposures. Exposure is found to increase with a firm's growth opportunity. Last but not least, we find that leverage ratios and growth opportunities impact more significantly on exposures for firms with separation of control and cash flow rights.