Assessing the Effects of Trade-Related Exchange Rate Fluctuations on Credit Availability and Financial Stability in China
DOI:
https://doi.org/10.70112/ajms-2024.13.1.4236Keywords:
Trade Wars, Exchange Rate Volatility, Credit Market, Chinese Yuan (CNY), Financial StabilityAbstract
The recent trade wars between China, the United States, and Australia have significantly impacted global economic dynamics. As China relies heavily on international trade, these conflicts have led to fluctuations in the Chinese yuan (CNY), straining financial stability. This study aims to analyze the influence of this volatility in the exchange rate on China’s credit market, focusing on how fluctuations in the CNY against the U.S. dollar and Australian dollar have influenced credit availability, loan demand, and overall financial stability. The study employs a mixed-methods approach, combining an autoregressive distributed lag (ARDL) model. The findings reveal a strong correlation between exchange rate volatility and credit market conditions, with the depreciation of the CNY during trade tensions leading to tighter credit conditions and higher borrowing costs. Chinese banks responded by tightening lending standards and increasing interest rates, which helped mitigate some of the adverse effects. However, the ongoing nature of trade tensions underscores the need for continued vigilance and adaptive strategies, including economic diversification, strengthening financial infrastructure, and enhancing policy coordination to ensure long-term resilience and stability in China’s financial system.
References
Allayannis, G., & Ofek, E. (2001). Exchange rate exposure, hedging, and the use of foreign currency derivatives. Journal of International Money and Finance, 20(2), 273-296. https://doi.org/10.1016/S0261-5606(00)00050-4.
Bertola, G., & Svensson, L. E. O. (1993). Stochastic devaluation risk and the empirical fit of target-zone models. Review of Economic Studies, 60(3), 689-712. https://doi.org/10.2307/2298136
Bown, C. P. (2020). The 2018 US-China trade conflict after 40 yearsof special protection. Journal of Economic Perspectives, 34(3), 101-127. https://doi.org/10.1257/jep.34.3.101
Broner, F., Lorenzoni, G., & Schmukler, S. L. (2006). Why doemerging economies borrow short term? Journal of the EuropeanEconomic Association, 4(2-3), 368-379. https://doi.org/10.1162/jeea. 2006.4.2-3.368
Calvo, G. A., Leiderman, L., & Reinhart, C. M. (1993). Capital inflows and real exchange rate appreciation in Latin America: The role of external factors. IMF Staff Papers, 40(1), 108-151. https://doi.org/10.2307/3867371
Chen, S., & Liu, Z. (2019). The impact of exchange rate movementson China’s credit market: Evidence from sectoral data. ChinaEconomic Review, 55, 1-12. https://doi.org/10.1016/j.chieco.2019. 01.001
Chinn, M. D. (2013). Global spillovers and domestic monetary policy: The impact of foreign interest rates on the economy. Journal o fInternational Money and Finance, 3(3), 25-43. https://doi.org/10.1016/j.jimonfin.2012.11.001
Eichengreen, B., & Hausmann, R. (1999). Exchange rates and financial fragility. Proceedings - Economic Policy Symposium - Jackson Hole, 329-368. https://doi.org/10.3386/w7418
Fajgelbaum, P. D., Goldberg, P. K., Kennedy, P. J., & Khandelwal, A.K.(2020). The return to protectionism. The Quarterly Journal ofEconomics, 135(1), 1-55. https://doi.org/10.1093/qje/qjz036
Fleming, J. M. (1962). Domestic financial policies under fixed andfloating exchange rates. IMF Staff Papers, 9(3), 369-380. https://doi.org/10.2307/3866091
Frankel, J. A., & Schmukler, S. L. (1996). Country fund discounts, asymmetric information and the Mexican crisis of 1994: Did local residents turn pessimistic before international investors? NBERWorking Paper Series, No. 5714, 1-44. https://doi.org/10.3386/w5714
Glick, R., & Rose, A. K. (2016). Currency unions and trade: A post-EMU reassessment. European Economic Review, 91, 63-79. https://doi.org/10.1016/j.euroecorev.2016.02.013
Goldstein, M., & Turner, P. (2004). Controlling currency mismatches in emerging markets. Institute for International Economics, 1-153.
He, Z., Wang, Q., & Yu, X. (2020). The impact of monetary policy on financial stability: Evidence from China. Journal of Financial Stability, 50, 100741. https://doi.org/10.1016/j.jfs.2020.100741
Hofmann, B., & Zhu, F. (2021). Financial conditions and financialstability. Journal of Banking & Finance, 124, 106054.
Huang, Y. (2021). The implications of China’s currency policy: Ananalysis of exchange rate stabilization measures. Asian Economic Policy Review, 16(1), 101-122. https://doi.org/10.1111/aepr.12345
Krugman, P. (1991). Increasing returns and economic geography. Journal of Political Economy, 99(3), 483-499. https://doi.org/10.1086/261763
Mundell, R. A. (1963). Capital mobility and stabilization policy under fixed and flexible exchange rates. Canadian Journal of Economics and Political Science, 29(4), 475-485. https://doi.org/10.2307/139336
Rey, H. (2015). Dilemma not trilemma: The global financial cycle andmonetary policy independence. NBER Working Paper Series, No.21162, 1-26. https://doi.org/10.3386/w21162
Zhang, H., & Cao, X. (2021). Trade tensions and exchange rate volatility: Evidence from China-Australia relations. Journal of Asian Economics, 72, 101243. https://doi.org/10.1016/j.asieco.2021.101243
Zhang, X., & Tang, L. (2020). Evaluating the effectiveness of China’s monetary policy in response to economic shocks. China & World Economy, 28(4), 1-24. https://doi.org/10.1111/cwe.12311
People’s Bank of China (PBOC). (2015-2024). Exchange rate data and credit market statistics. http://www.pbc.gov.cn/
International Monetary Fund. (2024). Exchange rate statistics and global economic indicators. International Financial Statistics.https://data.imf.org/
China Banking and Insurance Regulatory Commission (CBIRC).(2015-2024). Data on loan volumes, non-performing loans (NPLs), and banking sector performance. http://www.cbirc.gov.cn/
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2024 Centre for Research and Innovation
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
Copyright (c) 2024 Centre for Research and Innovation
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
