RMB internationalization and exchange rate exposure of Chinese listed firms

Abstract

This paper investigates the impact of Renminbi (RMB) internationalization on the foreign exchange rate risk exposure of Chinese listed firms. We find that RMB internationalization significantly reduces firms’ exposure to exchange rate fluctuations, particularly for non-US dollar currencies. However, it also increases exchange rate exposure to the US dollar. The findings remain robust even when controlling for other macroeconomic factors, utilizing an instrumental variable approach based on government reports and US dollar performance, and conducting multiple robustness tests. We also find that companies with heterogeneous products, low market power, and high levels of international competition benefit the most from RMB internationalization. Despite the US dollar’s continued centrality in the global monetary system, RMB internationalization offers a relief measure to Chinese firms in terms of exchange rate exposure.