Exchange Rate Dynamics and Risks in China: Empirical Evidence

In spite of a voluminous literature on the Chinese economy and its currency policy, the dynamics and risks of the Renminbi (RMB) exchange rate remain unsatisfactorily answered. To address these issues, this thesis builds upon the existing literature to investigate exchange rate dynamics and exposure in China. Generally, the thesis consists of three separate yet related empirical chapters that aim to unlock the secret of China's growth and uncertainties in the Chinese financial market, which have received much attention from policy-makers, academics and investors. Empirical evidences from four different levels are presented in this thesis. At the country level, it examines the linkage between the exchange rate and economic growth and confirms that the Chinese economy is driven by the expansion of exports but exhibits little correlation with the RMB exchange rate. At the market level, spillover effects emerge from stock returns to exchange rate changes, but exchange rate changes have less impact on stock prices in the long run due to the restriction on the daily trading band of the RMB. At the industry level, significant exchange rate exposure is identified, in particular for manufacturing industries. At the firm level, exchange rate exposure presents significant size effects, which indicate that large firms relatively suffer more during the ups and downs of the exchange rate than small firms. This is explained by the expansion of global operations for large firms.