Workig Paper 07/2008 Jue 2008 THE FOREIGN ECHANGE EPOSURE OF CHINESE BANKS Prepared by Eric Wog, Jim Wog ad Phyllis Leug 1 Research Deparme Absrac Usig he Capial Marke Approach ad equiy-price daa of 14 lised Chiese baks, his empirical sudy fids ha here is a posiive relaioship bewee bak size ad foreigexchage exposure, which may reflec larger foreig-exchage operaios ad radig posiios of larger Chiese baks, ad heir sigifica idirec foreig-exchage exposure arisig from impacs of he remibi exchage-rae movemes o heir cusomers. Empirical evidece also suggess ha he average foreig-exchage exposures of saeowed ad joi-sock commercial baks i Chia are higher ha hose of baks i Hog Kog, owihsadig ha heir paricipaio i ieraioal bakig busiesses is sill limied compared wih heir Hog Kog couerpars. I is also foud ha egaive foreig-exchage exposure is prevale for larger Chiese baks, suggesig ha a appreciaio of he remibi eds o reduce heir equiy values, ad is herefore likely o hamper he bakig secor s performace. Togeher wih he fac ha decreases i equiy values geerally imply higher defaul risk, how Chiese baks would be affeced uder differe scearios of remibi appreciaio should be closely moiored. JEL Classificaio Numbers: E58; F31; G21; G28 Keywords: Foreig exchage exposure; Bakig; Chia Auhor s E-Mail Address: Ecwog@hkma.gov.hk; Jim_HY_Wog@hkma.gov.hk; Plyleug@hkma.gov.hk The views ad aalysis expressed i he paper are hose of he auhors, ad do o ecessarily represe he views of he Hog Kog Moeary Auhoriy. 1 The auhors are graeful o Has Geberg ad Cho-Hoi Hui for heir suggesios ad commes.
2 Execuive Summary Usig equiy-price daa of 14 lised Chiese baks, his sudy adops he capialmarke approach o examie Chiese baks foreig-exchage exposure which comprises he direc exposure arisig from baks uhedged foreig asses ad liabiliies, ad he idirec exposure due o effecs of exchage-rae movemes o cash flows, ad credi risk of baks cusomers. Empirical evidece suggess ha here is a posiive relaioship bewee bak size ad foreig-exchage exposure. This may be parly due o he fac ha larger baks ed o have more sigifica foreig-exchage operaios ad radig posiios. Larger baks may also have more busiesses wih large ad ieraioal corporaios, of which compeiiveess ad profiabiliy are sesiive o exchage-rae movemes. These may coribue o he more sigifica foreig-exchage exposure of larger Chiese baks. I addiio, he average foreig-exchage exposures of sae-owed ad joi-sock commercial baks i Chia are higher ha hose of baks i Hog Kog, owihsadig ha heir paricipaio i ieraioal bakig busiesses is sill limied compared wih heir Hog Kog couerpars. This may reflec he lack of fiacial isrumes available for Chiese baks o hedge heir foreig-exchage risk, or ha he baks were less experieced i maagig foreig-exchage risk. I is also foud ha foreig-exchage exposure eds o be differe amog Chiese baks, wih egaive foreig-exchage exposure more prevale for larger Chiese baks, suggesig ha a appreciaio of he remibi eds o reduce heir equiy values. Sice larger baks cosiue a major porio of asses i he Chiese bakig idusry, his empirical resul suggess ha a appreciaio of he remibi is likely o hamper he Chiese bakig secor s performace. Togeher wih he fac ha decreases i equiy values geerally imply higher defaul risk, how Chiese baks would be affeced uder differe scearios of remibi appreciaio should be closely moiored.
3 I. INTRODUCTION Foreig exchage rae movemes could be a impora source of risk for bakig isiuios. 2 I he wors case, large foreig exchage losses could lead o bak failures. 3 Eve for a mild sceario, foreig exchage losses could cause huge burdes o baks profiabiliy. Due o heir serious implicaios for risk maageme ad bakig secor sabiliy, measurig baks foreig exchage exposure has log bee a core ieres of risk maageme professioals, academics, ad ceral baks. I he lieraure, a large umber of empirical works have bee carried ou o examie he foreig exchage exposure of baks. However, pas sudies maily focused o bakig markes which are well developed, icludig he US (Grammaikos e al. (1986), Choi e al. (1992), Choi ad Elyasiai (1997), ad Mari ad Mauer (2003, 2005)), Japa (Chamberlai e al. (1997)), Caada (Aidéhou ad Gueyie (2001)), ad Ausralia (Chi e al. (2007)), or large bakig isiuios (Mari (2000)). By compariso, sudies focusig o less developed bakig markes are relaively sca. 4 For Chia s bakig secor, he growig ieraioalisaio of Chiese baks o boh heir fud raisig aciviies ad bakig busiesses, he lack of fiacial isrumes available i he local marke for Chiese baks o hedge heir foreig exchage risk, ogeher wih he srucural chage i Chia s exchage rae regime i July 2005 may sugges ha Chiese baks i geeral have become icreasigly exposed o foreig exchage risk. Give his, a comprehesive empirical sudy o foreig exchage exposure of Chiese baks could provide useful isighs for boh exchage rae ad bakig policies i Chia. However, parly due o he lack of daa, pas aalyses o he foreig exchage exposure of Chiese baks are raher primiive which maily focused o he quaificaio of foreig exchage exposure arisig from he baks uhedged foreig asses ad liabiliies (i.e. direc or accouig exposures). As show by Chamberlai e al. (1997), o he exe ha baks direc exposure geerally provides a sigifica explaaio for baks foreig exchage exposure, i oly measures baks foreig exchage risk parially. Usig a bak s loa o a exporer as a example, Chamberlai e al. (1997) demosrae ha baks ha perfecly hedge heir accouig exposure could sill be exposed o sigifica foreig exchage risk if exchage rae movemes affec cash flows, compeiiveess, ad credi risk of baks cusomers sigificaly (i.e. idirec or 2 3 4 Reflecig his, mos baks have bee required o measure ad apply regulaory capial charges i respec of heir foreig exchage risk sice he issuace of Basel (1996). For example, he failure of Frakli Naioal Bak of New York i 1974 i he US, ad he liquidaio of Bakhaus (I.D.) ad Hersa KG i 1974 i Wes Germay. For deails, see Aharoy ad Swary (1983). There were oly a few sudies o less developed bakig markes, such as Hahm (2004) o he Korea bakig marke ad de We ad Gebreselasie (2004) o he Africa bakig marke.
4 ecoomic exposures). 5 This idicaes ha he sources of foreig exchage risk of baks are far more ha jus heir holdigs of e foreig asses. As for he ideificaio of foreig exchage exposure of idividual baks, while he direc exposure ca be discered largely from heir accouig daa, he idirec exposure, which arises from impacs of exchage rae flucuaios o he ecoomy i geeral ad baks cusomers i paricular, is more suble o be ideified from hese daa. Because of his, pas aalyses o he foreig exchage exposure of Chiese baks may o have bee able o give a comprehesive picure o how Chiese baks are exposed o foreig exchage risk. This is paricularly so give ha he idirec foreig exchage exposure of Chiese baks appears o be sigifica or eve a domia compoe of heir overall foreig exchage exposure, as Chiese baks geerally have a sigifica porio of loas ha are relaed o expor-impor aciviies, such as ledig o he maufacurig idusry, of which compeiiveess ad profiabiliy are sesiive o exchage rae movemes. Wih he icreased availabiliy of ime series ad cross-secio daa for Chiese baks equiy prices as a resul of he lisig of a umber of major sae-owed Chiese baks i sock markes sice mid-2005, i has ow become possible o ivesigae overall foreig exchage exposure (which comprises all direc ad idirec foreig exchage exposures) of he Chiese bakig secor more accuraely ad comprehesively usig he capial marke approach. Compared wih he cash flow approach, aoher commoly adoped approach, which is based o daa of baks fiacial saemes, he capial marke approach has various advaages. Specifically, he esimaes from he capial marke approach are forward lookig ad faciliae aalyses of defaul risk of Chiese baks. More imporaly, i remedies he problem of a lack of observaios i he cash flow approach. Because of hese, he capial marke approach is chose i his sudy. A brief iroducio of he wo empirical approaches ad deailed discussios o he choice of he empirical approach are provided i Appedix A. 6 Usig he capial marke approach wih equiy price daa of 14 lised Chiese baks i he Chiese sock marke (i.e. A-share marke) ad he Hog Kog sock marke (i.e. H-share marke), his sudy aemps o ivesigae he overall foreig exchage exposure of Chiese baks idividually. 5 6 For a exporer i he US, if he US dollar appreciaes, he compeiiveess of he exporer may deeriorae, which would imply a higher defaul risk of he exporer. The bak ha leds moey o his exporer is herefore exposed o foreig exchage exposure idirecly. For deails, see foooe 18 of Chamberlai e al. (1997). Comprehesive review of hese wo empirical approaches o bakig sudies ca be foud i Mari ad Mauer (2005). I should be oed ha hese wo approaches are also widely applied for sudyig oher idusries, see Muller ad Verschoor (2006).
5 The remider of he paper is orgaised as follows. Secios II ad III describe empirical specificaios, ad daa ad esimaio mehods respecively. Secio IV preses esimaio resuls. Secio V cocludes. II. THE EMPIRICAL SPECIFICATION Pas empirical sudies such as Choi e al. (1992), Wemore ad Brick (1994), ad Choi ad Elyasiai (1997) usig he capial marke approach o sudy foreig exchage risk of baks are esseially based o he followig asse pricig model wih differe modificaios 7, m I R, RF = α + β ( Rm RF ) + β I + β, + ε, (1) where R, ad RF are he holdig period rae of reur of he h bak sock from -1 o ad risk-free ieres rae a ime respecively. R RF ) is he excess rae of reur of ( m, he marke porfolio. The oher wo risk facors, I ad, represe he rae of chage i he yield of a risk-free bod 8 from -1 o, ad ha of exchage rae respecively. risk compoe for he h bak relaed o oher risks ad measureme errors. While he empirical specificaio i equaio (1) is widely applied i pas empirical sudies o esimae foreig exchage exposure of baks, i is o wihou drawbacks. Various heories ad empirical evidece sugges ha he specificaio i equaio (1) could be exeded ad improved. I he firs par of his secio, he releva heoreical ad empirical cosideraios for model specificaios will be discussed. Differe empirical specificaios for dual-lised Chiese baks ad locally lised Chiese baks which icorporae releva heoreical ad empirical cosideraios will be give i he laer par of his secio. ε, is a m For he marke risk sesiiviy, β, he specificaio i equaio (1) assumes ha oly he reur of he marke porfolio where a bak is lised affecs he bak s sock reur. However, his assumpio may o be appropriae for dual-lised firms. Theoreically, he expeced reur of a dual-lised firm depeds o oly o he reur of domesic marke porfolio, bu also o he reur of foreig marke porfolio (See Alexader e al. (1987)). Empirically, usig daily equiy price daa for 16 dual-lised 7 8 For pas empirical works usig he capial marke approach, see Appedix A. I he lieraure, various aleraive ieres rae variables are frequely adoped o esimae he ieres rae sesiiviy of baks equiy reurs. For example, Flaery ad James (1984) separaely use he rae of chage i he yield of 7-year Treasury bods ad he rae of chage i he price of 1-year Treasury bills as a proxy for he ieres rae variable. They show ha commercial bak sock reurs i he US are sesiive o ieres rae chages o maer which ieres rae variable is employed.
6 Chiese socks (i A- ad H-share markes) for he period Jue 1995 o Sepember 2001, Wag ad Jiag (2004) fid ha he H-shares of Chiese socks are exposed sigificaly o boh he Hog Kog ad Chiese sock markes, which is cosise wih he asse pricig heory for dual-lised firms. I addiio, he relaive weighs of he exposure of a firm s A- ad H-share reurs o he Hog Kog marke porfolio ad he Chiese marke porfolio are foud o be differe geerally. As he larges 6 lised Chiese baks are dual-lised i he A- ad H-share markes, igorig his feaure may resul i misspecificaios ad hus biased esimaio resuls. For he exchage rae sesiiviy, β, earlier empirical sudies geerally assumed ha firms equiy reurs oly deped o coemporaeous chages i exchage raes. However, empirical evidece by Amihud (1994), Barov ad Bodar (1994), ad Walsh (1994) sugges ha here is a lagged relaio bewee chages i exchage raes ad firm values due o mispricig. Barov ad Bodar (1994) formulae his Lagged Respose Hypohesis ad cojecure ha ivesors may have difficulies o characerise he relaio bewee chages i exchage raes ad firm performaces, ad hus equiy values, if ime series daa are limied. The Lagged Respose Hypohesis may herefore be releva o Chiese firms i geeral, ad Chiese baks i paricular, as he exchage regime i Chia was oly swiched i July 2005 ad he ime spa available for eiher ivesors or bak saff o obai he releva iformaio o udersad he relaioship bewee chages i he remibi exchage rae ad baks performace is shor. To icorporae releva heoreical cosideraios ad empirical evidece, we modify equaio (1) ad cosider he followig empirical specificaio for dual-lised Chiese bak socks, R, RF = α + β + β CH, A CH ( R ( R CH, CH, RF RF CH, CH, ) + β ) Dum A HK + β ( R HK, HK, A ( R RF HK, HK, ) RF HK, ) Dum A (2) + β Dum A A + β I I + J j= 0 β j, ε j +,
7 where R, ad RF are he holdig period rae of reur of he h bak sock shares, eiher A-shares or H-shares, from -1 o i erms of he remibi ad he risk-free ieres rae of he marke ha he bak is lised. R RF ) is he excess reur of he Chiese ( CH, CH, marke porfolio (i.e. eiher he Shezhe Sock Exchage or he Shaghai Sock Exchage, depedig o where he baks are lised), while R RF ) is he excess ( HK, HK, reur of he Hog Kog marke porfolio. Dum A is a dummy variable defied as oe if he observaios are from he Chiese sock marke (i.e. baks A-share equiy reurs), ad zero if he observaios are from he Hog Kog sock marke (i.e. baks H-share equiy reurs i erms of he remibi). The iclusio of he above marke risk relaed explaaory variables basically follows he spiri of he asse pricig model for dual-lised firms by Alexader e al. (1987) ad he empirical evidece by Wag ad Jiag (2004). CH CH, A HK HK, A By defiiio, β + β ad β + β are he marke sesiiviies of he excess reurs of he Chiese bak s A-shares o he excess reurs of he Chiese marke porfolio ad ha of he Hog Kog marke porfolio respecively, while he marke sesiiviies of he excess reurs of a Chiese bak s H-shares i erms of he remibi o he excess reurs of he Chiese marke porfolio ad ha of he Hog Kog marke porfolio respecively. We also iclude he dummy variable Dum A i he esimaios o capure ay srucural differece bewee he excess reurs of baks A- shares ad H-shares. CH β ad HK β are I For esimaig ieres rae sesiiviies, β, we iclude a explaaory variable i he esimaio equaio, amely he rae of chage i he yield of risk-free bods ( I ). 9 This specificaio is cosise wih he Mauriy Mismach Hypohesis by Flaery ad James (1984) ad faciliaes he esimaio of he sesiiviies of Chiese baks performace o chages i risk-free ieres raes i Chia. Regardig he foreig exchage exposure of Chiese baks, i is esimaed J hrough he erms β j, j. This specificaio assumes ha excess reurs of Chiese j= 0 baks are a fucio of coemporaeous ad lagged exchage raes (up o he J h lagged period), which is cosise wih he Lagged Respose Hypohesis by Barov ad Bodar (1994). Uder he specificaio i equaio (2), foreig exchage exposure of he h J Chiese bak, β, is defied as β j,. I his sudy, is defied as he perceage j= 0 chage of he remibi exchage rae, which is defied as he US dollar value of a ui of 9 This is proxied by he rae of chage i he yield of 5-year Chiese goverme bods.
8 he Remibi. 10,11 A icrease i he exchage rae implies a appreciaio of he remibi, ad vice versa. A egaive (posiive) β suggess herefore ha a appreciaio of he remibi would geerae egaive (posiive) impacs o he expeced fuure cash flow of he h Chiese bak, ad may herefore reduce (icrease) is equiy reurs. For Chiese baks ha are lised oly i he Chiese sock marke, we adop he followig empirical specificaio, J CH I R, RF = α + β ( RCH RF CH, ) + β I + β j,, j + ε, j= 0 (3) Equaio (3) ca be regarded as a simplified versio of equaio (2), wih he regressors relaed o he excess reur of he Hog Kog marke porfolio ( RHK RF, ), HK beig excluded from esimaios. The adopio of such a specificaio for locally lised Chiese baks is jusified by he fac ha locally lised firms i geeral should oly be exposed sigificaly o risk i he local marke. III. DATA AND ESTIMATION METHOD We employ i he esimaio a pael daase ha coais 14 lised Chiese baks. Of hese, hree are sae-owed commercial baks 12, eigh are joi-sock commercial baks 13, ad he remaiig hree are ciy commercial baks 14. I erms of asse size, he sample baks ogeher accoued for over 55% of oal asses of he Chiese 10 11 12 13 14 could be also defied as he remibi exchage rae agais currecies oher ha he US dollar (e.g. he remibi exchage rae agais he Japaese Ye). I he lieraure, whe differe pairs of exchage raes are cosidered, esimaios are usually performed separaely for each pair of exchage rae. I his sudy, we focus o he remibi exchage rae agais he US dollar, as mos discussios i he academic ad media regardig Chia s exchage rae movemes focus o he remibi exchage rae agais he US dollar. Neverheless, he foreig exchage exposures of Chiese baks i erms of he remibi exchage rae agais he Japaese Ye ad Euro were also examied. Empirically, we fid ha larger Chiese baks i geeral are o sigificaly exposed o he risk of he remibi exchage rae agais he Japaese Ye ad Euro. Therefore, implicaios of he foreig exchage exposure arisig from chages i he remibi exchage rae agais Euro or he Japaese Ye for he Chiese bakig secor may o be very sigifica. Coveioally, he remibi exchage rae is quoed as he remibi value of a ui of he US dollar. We use is iverse i his sudy maily for coveiece i ierpreig he esimaed coefficies of. I should be oed ha defiig he remibi exchage rae reciprocally would oly affec he sig of he esimaed coefficies of. These iclude Idusrial ad Commercial Bak of Chia, Chia Cosrucio Bak, ad Bak of Chia. These iclude Bak of Commuicaios, Chia Merchas Bak, Chia CITIC Bak, Shaghai Pudog Developme Bak, Chia Misheg Bak, Idusrial Bak, Huaxia Bak, ad Shezhe Developme Bak. These iclude Bak of Beijig, Bak of Najig, ad Bak of Nigbo.
9 bakig idusry as of ed-2006. Therefore, he sample should be adequae o give a represeaive picure for he marke. The daa se coais daily equiy price daa of he 14 Chiese baks for he period 21 July 2005 o ed-february 2008, wih he daa availabiliy varyig across idividual baks due o differe daes of iiial public offerigs (IPOs) of he baks. The sample sarig dae is chose o be 21 July 2005 whe he srucural chage of Chia s exchage rae regime ook place. 15 Exedig he sarig dae of he sample o a earlier dae may o be desirable because (1) he remibi exchage rae agais he US dollar was virually uchaged before ha dae, which may resul i biased esimaio resuls, ad (2) a majoriy of he 14 Chiese baks were oly lised afer 21 July 2005. 16 While usig daily equiy price daa ca help remedy he problem of isufficie empirical observaios i he sudy of Chiese baks, oe drawback is ha he daase may coai some ouliers, which could arise from eiher sudde chages i marke seimes or some special eves of he baks (such as sharp rises i prices i he firs radig day afer IPOs). Icludig hese ouliers i he sample may lead o biased resuls, as he esimaios could be uduly affeced by hem. Because of his, observaios wih a excess daily reur lower ha he 1 s perceile or higher ha he 99 h perceile of he daa for each bak are excluded from he sample for esimaios. Of he 14 Chiese baks, six are dual-lised i boh he Chiese ad Hog Kog sock markes. I cosrucig he esimaio sample, we uilise heir daily equiy price daa of boh heir A- ad H-shares. Sice H-share prices are deomiaed i Hog Kog dollars, he excess reurs of baks H-shares are covered io he remibi usig he spo exchage raes. For he remaiig eigh Chiese baks, which are purely locally lised, all observaios are cosruced usig heir A-share equiy daa. Regardig daa for he explaaory variables, he daily reurs of he Chiese marke porfolio, R,, are approximaed by he Shaghai Sock Exchage A- CH Share Idex (for baks lised i he Shaghai Sock Exchage) or he Shezhe Sock Exchage Sock A-Share Idex (for baks lised i he Shezhe Sock Exchage). The risk-free ieres rae i Chia is proxied by he 5-year yield of Chiese goverme bods. 17 The daily reurs of he Hog Kog marke porfolio, R HK,, is approximaed by 15 16 17 Shifig from de faco peggig he remibi exchage rae o he US dollar o deermiig he remibi exchage rae based o marke supply ad demad codiios wih referece o a baske of currecies. I fac, oly five of he 14 lised baks were lised i he A-share marke before 21 July 2005. They are Chia Merchas Bak, Shaghai Pudog Developme Bak, Chia Misheg Bak, Huaxia Bak, ad Shezhe Developme Bak. We cosider hree differe mauriies for he yield of risk-free goverme bods. They are he yields of 1-year, 5-year, ad 10-year goverme bods i Chia. I is foud ha he daa for 1-year ad 10- year goverme bods yields are o frequely updaed i he early par of he sample period which
10 he Hag Seg Idex. We use he 5-year yield of Exchage Fud Noes o proxy for he risk-free ieres rae i Hog Kog, RF HK,. For he daily perceage chages of Chia s risk-free ieres rae ( I ), we calculae i usig he 5-year yield of Chiese goverme bods. For he daily perceage of appreciaio i he remibi exchage rae agais he US dollar, j, i is calculaed by he correspodig remibi spo raes. All daa used i his sudy, icludig he equiy price daa of Chiese baks, are obaied from Bloomberg. We esimae foreig exchage exposure ad oher risk parameers for each dual-lised ad locally lised Chiese baks by he Ordiary Leas Squares (OLS) mehod usig he empirical specificaio i equaios (2) ad (3) respecively. 18 For dual-lised Chiese baks, sice he sample is cosruced usig boh heir A- ad H-share prices, he problem of heeroskedasiciy may exis. Therefore, -saisics repored for he dual-lised Chiese baks are derived based o he mehod proposed by Whie ad Domowiz (1984) o accommodae for he heeroskedasiciy problem. I order o obai he opimal model for each bak, we firs ru all possible regressios which uilise all combiaios of he regressors. Amog he esimaed regressio models, we selec he opimal model for each bak usig he Akaike (1973) iformaio crierio, which is a widely applied model selecio crierio i he lieraure. Sice his model selecio mehod becomes impracical for a large umber of explaaory variables, we se he maximum umber of lags for o be 5 (i.e. J = 5 i equaios (2) ad (3)), so ha he umber of explaaory variables is limied o 11. 18 may be due o iacive radig of hese wo ypes of bods. As a resul, he yield of 5-year goverme bods is chose. Aleraively, a sysem of regressios usig he Seemigly Urelaed Regressio (SUR) mehod, which is esseially a geeralised leas squares mehod accouig for he exisece of coemporaeous correlaio amog equaios, ca be employed o esimae foreig exchage exposure of he 14 Chiese baks joily. Theoreically, he SUR mehod could improve he efficiecy of he esimaes sigificaly if (1) he coemporaeous correlaio amog equaios is large ad ca be esimaed accuraely, (2) he correlaio amog regressors i differe equaios is small (See p.452, Judge e al. (1988)). Sice he umber of observaios for some Chiese baks is raher small, i paricular he hree ciy commercial baks, we may o be able o esimae he coemporaeous correlaio amog he 14 Chiese baks accuraely. The efficiecy gais of usig he SUR mehod may hus be very limied. Therefore, we adop he OLS mehod i his sudy. Neverheless, we use he SUR mehod o esimae he foreig exchage exposure for each dual-lised Chiese bak, as heir A- ad H- shares should exhibi a sigifica coemporaeous correlaio, ad he efficiecy gais of usig he SUR mehod may be more sigifica. However, he foreig exchage exposure esimaes by usig he SUR mehod ur ou o be similar o hose obaied from he OLS mehod.
11 IV. ESTIMATION RESULTS Esimaio resuls for dual-lised ad locally lised Chiese baks are preseed i Tables 1 ad 2 respecively. Mai fidigs are as follows 19 : 1. Empirical evidece suggess ha here is a sigifica relaioship bewee bak size (as measured by oal asses) ad overall foreig exchage exposure (which icludes all direc ad idirec exposures), i erms of eiher he sigificace or he magiude of he esimaed β : (a) For he former, larger baks he sae-owed commercial baks ad joi-sock commercial baks are foud more likely o have a sigifica foreig exchage exposure, eiher posiive or egaive, ha heir smaller couerpars he ciy commercial baks. Reflecig his, all he hree sae-owed commercial baks ad five of he eigh joisock commercial baks i he sample are esimaed o have sigifica foreig exchage exposure (i.e. eiher have a posiive or a egaive β ), while oly oe of he hree ciy-commercial baks is esimaed o have sigifica foreig exchage exposure. (b) (c) Regardig he magiude of he esimaed β (measured by i absolue value), i eded o be larger for larger baks. For he sae-owed commercial baks as a group, which comprises he hree larges baks i he sample, he average magiude is abou 1.8542. The correspodig value for he group of joi-sock commercial baks, which coais eigh smaller baks, is 0.6729, while ha of he group of ciy commercial baks, which is he smalles bakig group, is oly 0.1221. 20 This suggess ha he resulig volailiy o equiy values due o remibi exchage rae movemes, eiher a appreciaio or a depreciaio, eded o be larger for larger baks (a) ad (b) may be parly due o he fac ha larger baks ed o have larger foreig exchage radig posiios, ad more sigifica foreig exchage operaios hrough eiher heir overseas braches, subsidiaries, or joi-veures wih foreig fiacial isiuios. A he same ime, 19 20 As he mai objecive of his sudy is o esimae foreig exchage exposure of Chiese baks, fidigs oher ha foreig exchage exposure are preseed i Appedix B. The resul is o alered sigificaly whe icludig oly hose baks wih o-zero. Calculaig o his basis, he average foreig exchage exposure of sae-owed commercial baks, joi-sock commercial baks, ad ciy commercial baks are 1.8542, 1.0767, ad 0.3663 respecively. β
12 sice hey also ed o have more busiesses wih large ad ieraioal corporaios, of which compeiiveess ad profiabiliy are sesiive o exchage rae movemes, sigifica foreig exchage exposure of larger Chiese baks may arise from his macro-chael ha rasmis foreig exchage risk o baks via impacs of he remibi exchage rae movemes o baks cusomers. These may coribue o he more sigifica foreig exchage exposure of larger Chiese baks. 2. To gauge he relaive size of he foreig exchage exposure of Chiese baks, we also esimae for compariso he foreig exchage exposure for a group of 12 lised baks i Hog Kog, usig he same specificaio i equaio (3), bu replacig ( RCH RF, ), CH ad I wih heir Hog Kog couerpars. 21 Such a model specificaio aemps o reveal how baks i Hog Kog are exposed o he risk of he remibi exchage rae movemes agais he US dollar, wih defied as he daily perceage appreciaio i he remibi exchage rae agais he US dollar. I should be oed ha such a compariso is subjec o sigifica caveas, give he sigifica differeces bewee Chiese baks ad Hog Kog baks. 22 (a) The resuls show ha he average magiude of foreig exchage exposure of baks i Hog Kog is 0.4264. This is sigificaly lower ha 1.8542 for he hree sae-owed commercial baks, ad 0.6729 for he eigh joi-sock commercial baks i Chia. I coras, he average magiude of foreig exchage exposure of he hree ciy commercial baks (0.1221) is smaller ha ha of Hog Kog baks. This suggess ha larger Chiese baks are i geeral exposed more o he risk of remibi exchage rae movemes agais he US dollar ha eiher baks i Hog Kog or heir smaller couerpars i Chia. (b) Eve whe i he esimaio of Hog Kog baks is replaced by he daily perceage chage of he Hog Kog dollar rade-weighed effecive omial exchage rae idex ( EERI ), which is a broader defiiio of exchage rae movemes, he average magiude of 21 22 The sample icludes Bak of Chia (HK), Bak of Eas Asia, Chog Hig Bak, CITIC Ka Wah Bak, Dah Sig Bak, Fubo Bak, Hag Seg Bak, HSBC, ICBC (Asia), Sadard Charered Bak, Wig Hag Bak, ad Wig Lug Bak. We also esimae he average foreig exchage exposure of Hog Kog baks by excludig wo of he larger baks, amely HSBC ad he Sadard Charered Bak from he sample, as hey are o a large exe more ieraioalised ad have sigificaly differe asse composiios from oher Hog Kog baks. The average magiude of foreig exchage exposure hus esimaed ured ou o be very similar o he resul of usig he complee sample. For example, i he coex of foreig exchage busiesses, baks i Hog Kog i geeral would have a larger auoomy regardig busiess sraegies ad operaios ha baks i Chia.
13 foreig exposure of baks i Hog Kog, esimaed o be 0.6459, is sill lower ha ha of sae-owed ad joi-sae commercial baks. (c) I is o appare ha why he foreig exchage exposure of Chiese baks as esimaed is larger ha Hog Kog baks, paricularly give ha he paricipaio of Chiese baks i ieraioal bakig busiesses should sill be limied whe compared wih Hog Kog baks. I is, however, possible ha he esimaed larger foreig exchage exposure of Chiese baks may reflec he lack of fiacial isrumes available i he local marke o hedge heir foreig exchage risk, or perhaps because hey are less experieced i maagig foreig exchage risk. 3. Cosise wih pas empirical fidigs for oher bakig markes, foreig exchage exposure eds o be differe amogs Chiese baks. Of he 14 lised Chiese baks, six are esimaed o have a egaive β, suggesig ha a appreciaio of he remibi agais he US dollar eds o geerae egaive impacs o baks values. O he oher had, hree baks are esimaed o have posiive β, which idicaes he opposie, ad he remaiig five are esimaed o have o sigifica foreig exchage exposure. 4. To he exe ha foreig exchage exposure eds o be differe amogs Chiese baks, egaive foreig exchage exposures are more prevale for larger Chiese baks, suggesig ha a appreciaio of he remibi eds o reduce heir equiy values. Specifically, we fid ha a appreciaio of he remibi by 1% would o average reduce he excess equiy reurs for larger baks sae-owed commercial baks by 1.27% ad joi-sock commercial baks by 0.41% bu may boos he excess equiy reurs for smaller baks (ciy-commercial baks), by 0.12%. O he whole, sice he sae-owed ad joi-sock commercial baks cosiue more ha 67% of asses i he Chiese bakig marke (as of ed-2006) 23, a appreciaio of he remibi is likely o hamper he Chiese bakig secor s performace. 23 Accordig o he People s Bak of Chia (2007), he oal asse values of saed-owed commercial baks, joi-sock commercial baks, ad he bakig secor as a whole are RMB 24,236 billios, RMB 5,445 billios, ad RMB 43,950 billios respecively as of ed-2006.
14 V. CONCLUSION Usig equiy-price daa of 14 lised Chiese baks, his sudy adops he capial-marke approach o examie Chiese baks foreig-exchage exposure which comprises he direc exposure arisig from baks uhedged foreig asses ad liabiliies, ad he idirec exposure due o effecs of exchage-rae movemes o cash flows, ad credi risk of baks cusomers. Empirical evidece suggess ha here is a posiive relaioship bewee bak size ad foreig-exchage exposure. This may be parly due o he fac ha larger baks ed o have more sigifica foreig-exchage operaios ad radig posiios. Larger baks may also have more busiesses wih large ad ieraioal corporaios, of which compeiiveess ad profiabiliy are sesiive o exchage-rae movemes. These may coribue o he more sigifica foreig-exchage exposure of larger Chiese baks. I addiio, he average foreig-exchage exposures of sae-owed ad joi-sock commercial baks i Chia are higher ha hose of baks i Hog Kog, owihsadig ha heir paricipaio i ieraioal bakig busiesses is sill limied compared wih heir Hog Kog couerpars. This may reflec he lack of fiacial isrumes available for Chiese baks o hedge heir foreig exchage risk, or ha he baks were less experieced i maagig foreig-exchage risk. I is also foud ha foreig-exchage exposure eds o be differe amog Chiese baks, wih egaive foreig-exchage exposure more prevale for larger Chiese baks, suggesig ha a appreciaio of he remibi eds o reduce heir equiy values. Sice larger baks cosiue a major porio of asses i he Chiese bakig idusry, his empirical resul suggess ha a appreciaio of he remibi is likely o hamper he Chiese bakig secor s performace. The empirical resuls sugges ha a appreciaio of he remibi will likely have a egaive impac o he performace, ad hus he equiy values, of Chiese baks, wih he impacs o larger baks beig more proouced. Togeher wih he fac ha decreases i equiy values geerally imply higher defaul risk, how Chiese baks would be affeced uder differe scearios of remibi appreciaio should be closely moiored.
15 Table 1: Esimaio resuls of foreig exchage exposure of dual-lised Chiese baks Explaaory variables Iercep (R CH, -RF CH, )Dum A 0.8429*** (21.59) (R HK, -RF HK, )Dum A -0.9282*** (-12.37) Sae-owed commercial bak 1 0.0004 (0.61) Sae-owed commercial bak 2 0.0002 (0.29) 0.7053*** (7.75) -0.9759*** (-10.60) Sae-owed commercial bak 3-0.0006 (-1.12) 0.7752*** (20.25) -0.7527*** (-12.18) Joi-sock commercial bak 1 0.0004 (0.74) 0.8614*** (14.81) -1.0020*** (-11.69) Joi-sock commercial bak 2 0.0003 (0.45) 0.8625*** (16.70) -0.8628*** (-10.90) Joi-sock commercial bak 3-0.0023** (-2.55) 0.8968*** (14.29) -0.6449*** (-7.62) Dum A R CH, -RF CH, R HK, -RF HK, 1.0877*** (21.20) I -0.2261** (-2.22) -1-2 -1.1209** (-2.23) -3-0.8564* (-1.68) -4 1.1650*** (24.45) 0.8698*** (22.98) -0.8633* (-1.88) -0.9323* (-1.87) -0.9168** (-2.24) 1.1239*** (20.09) -0.1054** (-2.30) -0.8120** (-2.07) 1.0905*** (20.51) 0.6897*** (12.70) -0.2546*** (-2.73) -5 0.8730* (1.75) 1.0657 (1.47) R 2 0.6386 0.5587 0.5605 0.5221 0.5094 0.5394 Adjused R 2 0.6350 0.5559 0.5571 0.5189 0.5076 0.5333 DW saisics 1.872 1.817 2.097 1.736 1.959 2.030 J j= 0 β j, -1.9773 [0.8153] 0.8730 [0.5188] -2.7124 [0.9126] -0.8120 [0.4164] 0.0000 [NA] 1.0657 [0.7655] Noes: (1) Figures i pareheses are -saisics. Figures i brackes are sadard errors. (2) *, **, ad *** deoe saisical sigificace a he 10%, 5% ad 1% levels respecively. (3) For each bak, all possible regressios ha uilise all combiaios of he regressors are esimaed firsly. Amog he esimaed models for each bak, he opimal model usig he Akaike (1973) iformaio crierio is seleced ad show i he able. Therefore, he opimal model specificaio varies across he baks ad some explaaory variables ha wih low explaaory power are o icluded i he opimal model (i.e. variables wih blak coefficie esimaes). (4) NA: No applicable.
16 Table 2: Esimaio resuls of foreig exchage exposure of locally lised Chiese baks Joi-sock Explaaory variables commercial bak 4 Iercep 0.0010 (1.06) R CH, -RF CH, 0.9133*** (17.66) I Joi-sock commercial bak 5 0.0012 (0.74) 0.9851*** (13.91) -0.3977* (-1.77) Joi-sock commercial bak 6 0.0009 (1.06) 0.9654*** (19.80) Joi-sock commercial bak 7 0.0009 (0.90) 1.0565*** (19.98) Joi-sock commercial bak 8 0.0009 (0.92) 0.7167*** (14.70) -0.1221* (-1.74) Ciy-commercial bak 1-0.0006 (-0.32) 0.9031*** (10.64) -1.0585*** (-3.54) Ciy-commercial bak 2-0.0013 (-0.79) 0.8161*** (10.88) -0.6159** (-2.42) Ciy-commercial bak 3-0.0025 (-1.10) 0.9464*** (9.94) -0.7615** (-2.40) -1-2 -0.9842 (-1.53) -1.3447* (-1.86) -2.6138 (-1.55) -3-4 -1.1769 (-1.59) -5 2.9801* (1.72) R 2 0.3650 0.4420 0.4216 0.4398 0.2736 0.5606 0.4658 0.4717 Adjused R 2 0.3627 0.4376 0.4195 0.4377 0.2711 0.5517 0.4583 0.4565 DW saisics 1.9330 1.732 2.017 1.918 1.866 2.167 1.832 1.939 J j= 0-1.1769 β j, [0.7420] 0.0000 [NA] -0.9842 [0.6436] -1.3447 [0.7240] Noes: (1) Figures i pareheses are -saisics. Figures i brackes are sadard errors. (2) *, **, ad *** deoe saisical sigificace a he 10%, 5% ad 1% levels respecively. (3) For each bak, all possible regressios ha uilise all combiaios of he regressors are esimaed firsly. Amog he esimaed models for each bak, he opimal model usig he Akaike (1973) iformaio crierio is seleced ad show i he able. Therefore, he opimal model specificaio varies across he baks ad some explaaory variables ha wih low explaaory power are o icluded i he opimal model (i.e. variables wih blak coefficie esimaes). (4) NA: No applicable. 0.0000 [NA] 0.0000 [NA] 0.0000 [NA] 0.3663 [2.3504]
17 Appedix A: Approach Lieraure Review ad Discussios of he Choice of Empirical Mos pas empirical sudies abou he foreig exchage exposure of baks have ried o quaify he sesiiviy of baks values or icomes o exchage rae movemes. I he lieraure, here are wo mai approaches o quaify foreig exchage exposure of baks, amely he capial marke approach ad he cash flow approach. The capial marke approach assesses baks foreig exchage exposure by aalysig he sesiiviy of equiy reurs of baks o exchage rae movemes, while he cash flow approach ideifies foreig exchage exposure of baks by sudyig he relaioship bewee baks operaig icomes repored i heir fiacial disclosures ad exchage raes. I he firs par of his appedix, we iroduce briefly he wo approaches by discussig some pas empirical works. A he ed of his appedix, we discuss he selecio of empirical approach i his sudy. The Capial Marke Approach I essece, he capial marke approach assumes ha he valuaio of a bak is refleced by is equiy reurs. Give his, ay facor ha affecs he valuaio of a bak is correlaed wih he bak s equiy reurs. Sice here are may facors such as ieres raes, sock marke reurs, ad exchage raes ha may affec baks values ad hus heir equiy reurs, muli-facor models, which regress equiy reurs of baks o various releva facors joily, are usually applied for he capial marke approach. Earlier sudies usually iclude he followig risk facors o explai baks equiy reurs. 1. Excess reurs of he marke porfolio, (R m, - RF ): The iclusio of (R m, - RF ) as oe of he risk facors o explai he excess rae of reur of a bak sock R RF ) esseially follows he Capial Asse Pricig Model (CAPM). (, The esimaed coefficie of R RF ), which measures he sesiiviy of a ( m, bak s excess equiy reur o he excess marke porfolio reur, is geerally foud o be posiive ad saisically sigifica i pas empirical sudies, which is cosise wih he CAPM. 2. The rae of chage i yield of a risk-free bod, I: The cosideraio of I as a risk facor of baks equiy reurs is advocaed by Flaery ad James (1984), which posulaes ad ess he mauriy mismach hypohesis which saes ha differeces i he mauriy composiio of e omial asses of baks cause differeces i he ieres rae sesiiviy of bak sock reurs. For a ypical bak, sice he average mauriy of omial asses (which maily comprise loas) i geeral should be higher ha ha of omial liabiliies (which maily comprise deposis), he marke value of e omial asses of a bak
18 should behave similar o a log posiio of a bod wih mauriy equal o he average mauriy of he bak s e omial asses. Therefore, uaicipaed chages i ieres raes ed o resul i a decrease i a bak s equiy value, I implyig a egaive esimaed coefficie (i.e. β < 0). Empirically, usig daa o weekly sock reurs of 67 US commercial baks for he period Jauary 1976 o November 1981, Flaery ad James (1984) fid ha for a equally weighed porfolio of US commercial bak socks as a whole, here is a iverse relaio bewee uaicipaed ieres rae chages ad he reurs of bak socks, which is saisically sigifica ad robus o various ieres rae defiiios. Alhough laer sudies usually iclude I as a major risk facor of baks, i should be oed ha rece sudies esimaig fiacial risk of I idividual baks exhibi less solid evidece of he relevace of β ha hose repored by Flaery ad James (1984). For example, usig daa for 59 large US commercial baks for he period 1975 o 1992, Choi ad Elyasiai (1997) I fid ha β is sigifica for oly 23 baks ou of 59, alhough he esimaed I values of β ha are sigifica are all egaive. 3. The rae of chage i exchage rae, : The sudy of foreig exchage exposure of baks usig he capial marke approach is advocaed by Choi e al. (1992) i which a mulifacor model is esimaed o examie he sesiiviy of equiy reurs of 48 larges US commercial baks o chages i sock marke reurs, ieres raes, ad exchage raes based o mohly daa over he period 1975 o 1987. Empirically, he degree of a bak s foreig exposure is gauged by he value ad saisical sigificace of he esimaed coefficie of exchage raes (i.e. β i equaio (1)), which esseially measures he sesiiviy of bak sock reurs o exchage rae movemes. The cosideraio of foreig exchage risk as a mai facor affecig baks values by Choi e al. (1992) opeed a ew aveue i he lieraure, which differs from earlier sudies ha geerally suggesed ha oly marke reurs ad ieres raes are he mai risk facors of baks. 24 I order o provide heoreical foudaio for his cosideraio, Choi e al. (1992) develop a heoreical model which predics ha bak equiy reurs oly respod o uexpeced chages i fiacial risk facors icludig exchage raes, ad foreig currecy exposure of baks due o heir uhedged foreig currecy posiios i balace shees. Usig a rade-weighed mulilaeral foreig exchage value of he US dollar agais a baske of currecies 25 as a proxy for he exchage rae, Choi e al. (1992) esimae he uexpeced movemes i he exchage rae by usig a 24 25 See Flaery ad James (1984), Sweeey ad Warga (1986), Che ad Cha (1989), Michell (1989), Bae (1990) ad Yourougou (1990). The US dollar agais he currecies of he oher Group of Te couries plus Swizerlad.
19 ARIMA model 26,27, ad foud ha uexpeced appreciaio i he US dollar eded o reduce bak sock reurs before Ocober 1979, while i was he reverse i he pos-ocober 1979 period. They poied ou ha he empirical fidig was cosise wih he srucural chage aroud he lae 1970s ha he US bakig sysem gradually shifed from a posiive e posiio i some major foreig currecies 28 o a egaive e posiio. While he heory was o formally esed i Choi e al. (1992), a laer sudy by Wemore ad Brick (1994) provide empirical evidece o suppor he heory ha foreig exchage exposure of baks is relaed o heir uhedged foreig currecy posiios. Chamberlai e al. (1997) followed Choi e al. (1992) ad adoped he capial marke approach o examie he foreig exchage exposure of US baks, as well as Japaese baks. The sudy coribues o he lieraure i various ways. Firs, i exeds he sudy of foreig exchage exposure o Japaese baks by which ieraioal differeces i foreig exchage exposure were assessed. Secod, hey show ha higher frequecy daa, amely daily daa, are more appropriae for esimaig foreig exchage exposure compared o lower frequecy daa such as mohly daa. Third, Chamberlai e al. (1997) show ha baks uhedged foreig currecy posiios could oly parially explai heir exchage rae exposures. They argue ha eve for baks ha perfecly hedge heir foreig currecy posiios i balace shees could be exposed o foreig currecy risk because exchage rae movemes could affec cash flows, compeiiveess, ad credi risk of baks cusomers, which i urs may affec baks values ad icomes. 29 Laer sudies such as Choi ad Elyasiai (1997), Mari (2000), Aidéhou ad Gueyie (2001), Rya ad Worhigo (2002), de We ad Gebreselasie (2004), Hahm (2004), ad Chi e al. (2007) esseially followed he capial marke approach usig equaio (1) for differe markes or wih modified model specificaios. Despie heir differeces, empirical evidece geerally suggess ha he sigs ad values of β (i.e. foreig exchage exposure) vary subsaially amogs idividual baks eve i he same bakig marke. 26 27 28 29 Auoregressive Iegraed Movig Average model. A aleraive way o derive he uexpeced movemes of he exchage rae is based o he orhogoalisaio mehod, i which he residuals obaied from a regressio of he exchage rae o all oher facors serve as he uexpeced compoe of he exchage rae. However, various sudies, such as Gilibero (1985) ad Kae ad Ual (1988) poied ou ha he orhogoalisaio mehod may lead o biased esimaio resuls. Maily he Caadia dollar, Swiss frac, ad Briish poud. Chamberlai e al. (1997) used he followig example o illusrae his poeial source of foreig currecy exposure of baks: For a exporer i he US, if he US dollar appreciaes, he compeiiveess of he exporer may deeriorae, which would imply a higher defaul risk of he exporer. The bak ha leds moey o his exporer is herefore exposed o foreig exchage exposure idirecly. For deails, see foooe 18 of Chamberlai e al. (1997).
20 The Cash Flow Approach The applicaio of he cash flow approach o bakig sudies is advocaed by Mari ad Mauer (2003). 30 Similar o Choi e al. (1992), Mari ad Mauer (2003) focus o he US bakig marke ad ry o esimae he foreig exchage exposure of 105 US baks over he period 1988 o 1998. Isead of esimaig foreig exchage exposure of baks from equiy daa, Mari ad Mauer (2003) ideify baks foreig exchage exposure by explorig he relaioship bewee baks quarerly operaig icomes (before adjusmes for depreciaio ad exchage rae gais ad losses) disclosed i heir fiacial saemes ad five seleced bilaeral exchage raes agais he US dollar. 31 Mari ad Mauer (2003) firs derive he ime series of uaicipaed operaig icome for each bak as he residuals from a regressio ha he curre value of operaig icome is regressed by is previous four-quarer lagged value. The uaicipaed operaig icome is he sadardised 32 ad regressed o he curre ad lagged values of he perceage chage i a exchage rae facor, where he opimal lag legh of he exchage rae facor is deermied saisically 33. The exchage rae facor, which capures exchage rae variaios o explaied by he chages i ieres raes ad ecoomic aciviy, is defied as he residuals from regressig a bilaeral exchage rae o he ieres rae differeial bewee he foreig coury ad he US, ad he raio of real GDP of he foreig coury o he US. Mari ad Mauer (2003) classify a bak as havig shor-erm foreig exchage exposure if he opimal lag legh of he exchage rae facor is foud o be four quarers or less, ad havig log-erm exposure if he opimal lag legh is larger ha eigh quarers. Empirically, Mari ad Mauer (2003) fid ha domesically orieed baks ed o more frequely exhibi sigifica foreig exchage exposure ha heir ieraioally orieed couerpars, suggesig ha ecoomies of scale i exchage rae risk maageme may exis i he US bakig idusry. I addiio, hey fid ha logerm exposure is more prevale ha shor-erm exposure. Accordig o Mari ad Mauer (2003), his is because i is more difficul o ideify, measure, ad hedge log-erm foreig exchage exposure 34. A laer sudy by Mari ad Mauer (2005) also employ he cash flow approach o esimae foreig exchage exposure of large US baks. 30 31 32 33 34 I should be oed ha, however, Mari ad Mauer (2003) is o he firs empirical work ha adoped he cash flow approach o sudy exchage rae exposure. See Walsh (1994), for example. However, i Walsh (1994), he bakig idusry is excluded from he aalysis. They are, amely he Briish poud, Caadia dollar, Germa mark, Japaese ye, ad Mexica peso. By dividig he residuals by heir sadard deviaio. The maximum lag erm is se o be 12 quarers ad he opimal lag legh used i each regressio is deermied by he Akaike (1973) crierio. I is maily because publicly available daa of idividual baks fiacial saemes are oly available sice he early of 2000 for a majoriy of he Chiese baks i he sample. I addiio, hey are usually released o a aual basis. Quarerly fiacial daa are oly available afer 2005 for mos of he lised Chiese baks.
21 Cocepually, while he mehodologies are differe, he wo approaches are o coradicory o each oher. As log as equiy values of baks reflec largely he discoued expeced fuure cash flows of baks, as prediced by discoued cash flow models i equiy value aalyses (Gordo (1962)), he capial marke approach should be similar o he cash flow approach. Empirically, however, here are hree advaages of he capial marke approach over he cash flow approach for our sudy o he Chiese bakig marke. Firs, sice daa o baks icomes are geerally less available ha baks equiy daa due o lower frequecy of baks fiacial resul aoucemes, i is hard o apply he cash flow approach for sudyig baks ha have a shor fiacial hisory. For example, i order o obai reliable saisical resuls, Mari ad Mauer (2003) oly cover baks ha have a leas 30 cosecuive quarerly fiacial saemes i heir sudy. Based o Mari ad Mauer s (2003) crierio, oe of he Chiese baks i our sudy mee such requireme. O he oher had, of he 14 lised Chiese baks covered i his sudy, alhough mos have oly bee lised i or afer 2005, by employig he capial marke approach, he problem of a lack of observaios is parially remedied by he high frequecy of daa o equiy prices, exchage raes, ad ieres raes. Secod, as oed by Mari ad Mauer (2003) ad Muller ad Verschoor (2006), he foreig exchage exposure esimaed by he capial marke approach is forward lookig 35, while ha esimaed by he cash flow approach is backward lookig. From a policy aalysis perspecive, he capial marke approach would herefore be more appropriae. This is paricularly so give ha Chia s exchage rae regime ad bakig idusry have recely udergoe sigifica srucural chages. Backward lookig esimaes derived from he cash flow approach may o be able o reflec he effec of hese srucural chages adequaely. 35 Accordig o he discoued cash flow model for equiy price aalyses, he equiy value of a firm is he sum of discoued expeced fuure cash flow. So, by is aure, he capial marke approach is forward lookig.
22 Appedix B: Empirical fidigs oher ha foreig exchage exposure of Chiese baks 1. For dual-lised Chiese baks, heir A-shares are foud o be affeced more by he reurs of he Chiese marke porfolio ha he Hog Kog marke porfolio, which is cosise wih empirical fidigs by Wag ad Jiag (2004). Specifically, he performace of he Chiese marke appears o be a impora facor o deermie he performace of Chiese baks A-shares, as excess reurs of he Chiese marke porfolio are foud o be a sigifica facor affecig baks A-share equiy reurs for all baks, wih he esimaed marke risk sesiiviy ragig from 0.7053 o 0.8968. 36 I coras, Chiese baks A-share equiy reurs are exposed oly by a limied degree o he Hog Kog marke risk, as suggesed by heir esimaed sesiiviies o he Hog Kog marke porfolio, which are relaively small i geeral (ragig from 0.0448 o 0.2277) 37. For baks H-share reurs, dual-lised Chiese baks are foud o be exposed o Hog Kog s marke risk, wih he esimaed coefficie of he excess reurs of he Hog Kog marke porfolio, β HK, beig saisically sigifica a he 1% cofidece level for all dual-lised Chiese baks, ad he esimaes ragig from 0.6897 o 1.1239. However, hey are i geeral o sigificaly exposed o he risk of he Chiese marke porfolio. 2. Regardig ieres rae sesiiviy of Chiese baks, eigh ou of he 14 Chiese baks are esimaed o have sigifica ieres rae exposure. This resul is cosise wih empirical resuls i he US bakig marke by Choi ad Elyasiai (1997) which foud ha o all US commercial baks are exposed o sigifica ieres rae risk. 38 Ulike foreig exchage exposure which is esimaed o have differe sigs for differe Chiese baks, he eigh baks ha have sigifica ieres rae exposure are all foud o have egaive ieres rae exposure (i.e. egaive β ). This suggess ha icreases i ieres raes ed o reduce baks equiy values. I addiio, smaller baks, i paricular he hree ciy commercial baks, are foud o have higher ieres rae sesiiviies. This suggess ha moeary igheig i geeral produce egaive impacs o Chiese baks, wih he effec o smaller baks beig more proouced. 39 I 36 37 38 39 Noe ha i refers o ( I refers o ( HK β + β ) for dual-lised Chiese baks. CH β + β ). HK, A CH, A Choi ad Elyasiai (1997) foud ha while 59 large US commercial baks as a whole is esimaed o have sigifica ieres rae exposure, oly 23 of hem are foud o have sigifica ieres rae exposure idividually. This empirical fidig is cosise wih fiacial ews relaig o he Chiese bakig marke. For example, Souh Chia Morig Pos (10 March 2008) repored ha uder sric rules o bak ledig i 2008, Small ciy commercial baks, already srugglig o boos deposi levels, have bee hi he hardes, prompig hem o look for parerships or cosolidaio while heir cusomers are lef scramblig for fiacig. This idicaes ha smaller baks ed o suffer more sigificaly ha larger baks i he phase of moeary igheig.
23 Referece: Aharoy J., ad Swary I. (1983), Coagio Effecs of Bak Failures: Evidece from Capial Markes, Joural of Busiess, 56(3), pp.305-22. Akaike, H. (1973), Iformaio Theory ad he Exesio of he Maximum Likelihood Priciple, Proceedigs of Secod Ieraioal Symposium o Iformaio Theory, eds. Perov B. N., ad Csaki F., Budapes: Akedemiai Kiado. Alexader, G. J., Eu, C. S., ad Jaakiramaa, S. (1987), Asse Pricig ad Dual Lisig o Foreig Capial Markes: A Noe, Joural of Fiace, 42(1), pp.151-58. Amihud, Y. (1994), Evidece o Exchage Raes ad Valuaio of Equiy Shares, i Amidhud, Y., ad Levich, R. M., Eds., Exchage Raes ad Corporae Fiace, Busiess Oe Irwi: Homewood, IL. Aidéhou, R. B., ad Gueyie, J. P. (2001), Caadia Charered Baks Sock Reurs ad Exchage Rae Risk, Maageme Decisio, 39(4), pp.285-95. Bae, S. C. (1990), Ieres Rae Chages ad Commo Sock Reurs of Fiacial Isiuios: Revisied, Joural of Fiacial Research, 13(1), pp.71-9. Barov E., ad Bodar, G. M. (1994), Firm Valuaio, Earigs Expecaios, ad he Exchage-rae Exposure Effec, Joural of Fiace, 49(5), pp.1755-85. Basel Commiee o Bakig Supervisio (1996), Amedme o he Capial Accord o Icorporae Marke Risks, Basel, Swizerlad. Chamberlai, S., Howe, J. S., ad Popper, H. (1997), The Exchage Rae Exposure of U.S. ad Japaese Bakig Isiuio, Joural of Bakig ad Fiace, 21(6), pp.871-92. Che, C. R., ad Cha, A. (1989), Ieres Rae Sesiiviy, Asymmery, ad he Sock Reurs of Fiacial Isiuios, Fiacial Review, 24(3), pp.457-73. Chi, J., Tripe D., Youg M. (2007), Do Exchage Rae Affec he Sock Performace of Ausralia Baks?, 12 h Fisia-Melboure Cere for Fiacial Sudies Bakig ad Fiace Coferece, Melboure, 24-25 Sepember 2007. Choi, J. J., ad Elyasiai, E. (1997), Derivaives Exposure ad he Ieres Rae ad Exchage Rae Risks of U.S. Baks, Joural of Fiacial Services Research, 12(2/3), pp.267-86. Choi, J. J., Elyasiai, E., ad Kopecky, K. J. (1992), The Sesiiviy of Bak Sock Reurs o Marke, Ieres ad Exchage Rae Risk, Joural of Bakig ad Fiace, 16(5), pp.983-1004. De We, W. A., ad Gebreselasie, T. G. (2004), The Exchage Rae Exposure of Major Commercial Baks i Souh Africa, The Africa Fiace Joural, 6(2), pp.21-35.
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25 Rya, S., ad Worhigo, A. C. (2002), Time-Varyig Marke, Ieres Rae ad Exchage Rae Risk i Ausralia Bak Porfolio Sock Reurs: A Garch-M Approach, School of Ecoomics ad Fiace Discussio Papers ad Workig Paper Series, o. 112, School of Ecoomics ad Fiace, Queeslad Uiversiy of Techology. Sahmia, S. (2007), Effecs of Exchage Rae Depreciaio o Commercial Bak Failures i Idoesia, Joural of Fiacial Sabiliy, 3(2), pp.175-93. Sweeey, R. J., ad Warga, A. D. (1986), The Pricig of Ieres-rae Risk: Evidece from he Sock Marke, Joural of Fiace, 41(2), pp.393-410. The People s Bak of Chia (2007), Almaac of Chia s Fiace ad Bakig 2007. Walsh, E. J. (1994), Operaig Icome, Exchage Rae Chages, ad he Value of he Firm: a Emperical Aalysis, Joural of Accouig, Audiig & Fiace, 9(4), pp.703-24. Wemore, J. L., ad Brick J. R. (1994), Commercial Bak Risk: Marke, Ieres Rae, ad Foreig Exchage, Joural of Fiacial Research, 17(4), pp.585-96. Wag, S. S., ad Jiag, L. (2004), Locaio of Trade, Owership Resricio, ad Marke Illiquidiy: Examiig Chiese A- ad H-shares, Joural of Bakig ad Fiace, 28(6), pp.1273-97. Whie, H., ad Domowiz, I. (1984), Noliear Regressio wih Depede Observaios, Ecoomerica, 52(1), pp.143-61. Yourougou, P. (1990), Ieres-rae Risk ad he Pricig of Deposiory Fiacial Iermediary Commo Sock: Empirical Evidece, Joural of Bakig ad Fiace, 14(4), pp.803-20.