Currency Mismatch In China And An Empirical Study On The Influencing Factors

Currency Mismatch is defined as such that an economy (or banks, non financial firms, households) whose payments (or assets and liabilities) are denominated in foreign as well as domestic currency is sensitive to exchange rate risk. As more net foreign assets accumulate, China is facing more and more severe currency mismatch problem. So far, however, there is no consensus on how grave China's currency mismatch level is and even more limited literature on what factors affect China' currency mismatch situation.Based on the above considerations, the thesis is structured as follows:The Introduction part sets forth the background for the thesis and gives a rough picture of its overall structure.ChapterⅠgives a clear definition of "Currency Mismatch" and compares it with some other financial concepts which are easily confused. It then reviews the development of relevant literature both domestic and international.ChapterⅡfirst refers to literature for the most common index to calculate a country's aggregate currency mismatch—the Aggregate Effective Currency Mismatch (AECM) index and with certain appropriate amendments use AECM to calculate China's currency mismatch level between the period of 1981 to 2007. The result shows that China exhibits comparable severe and phase-wise currency mismatch.ChapterⅢtries to explore the factors that affect China's aggregate currency mismatch by establishing multi-linear econometric model and finds out that the flexibility of exchange rate regime, trade surplus and foreign direct investment play a role. This is followed by some policy suggestions.The final section concludes the overall of this thesis and also points out the direction to further research in future.