Foreign exchange and Chinese banks
Foreign exchange rate movements are a key source of risk for banking institutions. In a worst-case scenario, large foreign exchange losses could lead to bank failures. For a mild, not-so-bad scenario, foreign exchange losses could cause huge burdens on the banks’ profitability. Measuring banks’ foreign exchange exposure has been an essential interest of risk management professionals, academics, and central banks because otherwise, there are serious implications for banking sector stability. These are scenarios to think about in forex investing.
For the Chinese banking sector, the growing internationalization of Chinese banks poses problems. One problem is the fundraising activities regarding banking businesses. Another is the lack of financial instruments that are available in the local market for Chinese banks to hedge their foreign exchange risk. A third problem is the structural change in China’s exchange rate regime. Taken together, all these items suggest that the Chinese banks have become increasingly exposed to foreign exchange risk.
As for the identification of forex exposure of individual banks, direct exposure can be learned from their accounting data. That is very simple. However, identifying indirect exposure comes from the impact of exchange rate fluctuations on the economy in general terms and the banks’ customers. It’s indirect because these kinds of data are more subtle in nature. Therefore it’s due to the indirect exposure that makes it difficult to get a comprehensive picture of the Chinese banking market. Thus, past analyses on the forex exposure of Chinese banks may not have been data inclusive in how Chinese banks are exposed to foreign exchange risk.
The indirect forex exposure of Chinese banks appears to be a significant element of their overall foreign exchange exposure. Chinese banks have a sizeable portion of loans that are related to export-import activities. For example, lending to the manufacturing industry is such an area. This areas competitiveness and profitability are sensitive to exchange rate movements. Chinese forex investing may result in great profits in the future.