| Abstract: |
We examine the impact of renminbi revaluation on foreign firm valuations,
considering two surprise announcements of changes in China’s exchange rate
policy in 2005 and 2010 and employing data on some 6,000 firms in 44
economies. Stock returns rise with renminbi revaluation expectations. This
reaction appears to reflect a combination of improvements in general market
sentiment and specific trade effects. Expected renminbi appreciation has a
positive effect on firms exporting to China but a negative impact on those
providing inputs for the country’s processing exports. Stock prices rise for
firms competing with China in their home market but fall for firms importing
Chinese products with large imported-input content. There is also some
evidence that expected renminbi appreciation reduces the valuation of
financially-constrained firms, presumably because appreciation implies reduced
Chinese purchases of foreign securities. The results carry over when we
consider ten instances of market-perceived changes in prospective Chinese
currency policy. |