RMB Internationalization on The Performance of Chinese Listed Companies Vis-A-Vis Forex: A Proposed Financial Model

Abstract

This dissertation delves into the relationship between bank RMB internationalization and foreign exchange (forex) performance of China-listed companies, and consequently a financial model is constructed. This research is therefore concerned with the increasing global adoption of the Chinese currency, and the analysis of the link between the RMB Internationalization Index (RII) and some of the key forex performance metrics, such as the Foreign Exchange Exposure Ratio (FEER), Net Exposure (NE), and Realized Foreign Exchange Loss/Gain (RFELG).  The gathered evidence yields to a firm proposition of a positive correlation between the internationalization of China's RMB and the forex performance of Chinese listed companies. More explicitly, RII (RMB Internationalization Indices) is negatively related to Net Exposure and Realized Foreign Exchange Loss/Gain, which means that if companies adopt more RMB, they are less and less exposed to foreign currency risks. The findings reveal that the transition towards RMB-denominated transactions not only facilitates the stabilization of cash flows but also acts as a means of reducing the dependence on other currencies, especially the USD. On the other hand, one of the important findings is a U-shaped relationship between RMB internationalization and Foreign Exchange Exposure Ratio. Initially, companies might suffer increased exposure due to market uncertainty, but as the RMB develops into a more globally accepted currency, forex exposure will be less, consequently, firms will be more stable in the long-term. The financial model thus developed integrates those empirical findings and gives some practical recommendations for mitigating foreign exchange risks. Through the recommendations, it is made clear that dynamic hedging strategies must be adopted at each stage of RMB internationalization. In the early stages of RMB, companies with high exposure to exchange rate fluctuations could utilize aggressive hedging to be on the safe side. As the RMB becomes more widely accepted, firms would be able to transfer to low-risk hedging strategies and thus, decrease foreign currency liabilities further by increasing the use of RMB in international transactions. The model also indicates that businesses lath the stages of RMB internationalization to make informed investment decisions and adjust currency management strategies accordingly.