Following its accession to the World Trade Organization, capital mobility has increased and China is now being forced to shift to a floating exchange rate system in order to maintain an independent monetary policy (china in transaction, 2006) http://www.rieti.go.jp/en/china/06102701.html
Click R. and Coval J. (2002). The theory and practice of international financial management:
Once the MNE establishes FDI abroad, it is immediately confronted with foreign exchange risk. If the exchange rate changes, the home currency value of assets and liabilities denominated in the foreign currency changes. Furthermore, the home currency value of the income stream the foreign investment generates changes.
Foreign exchange exposure is the degree to which a company is affected by exchange rate changes. It is a measure of what the company has at stake. Exposure is of concern because it indicates the magnitude of any foreign exchange gain or loss corresponding to a particular exchange rate change.
Li and Ma (2007) foreign exchange risk management in multinationals: an empirical investigation on China, Japan and US.
In recent years, foreign exchange risk management has received increasing attention in both corporate practice and the literature. A number of studies have contributed to develop the theory and provide the theory and provide insights into the corporate practices of the foreign exchange risk management. A better understanding of foreign exchange risk which is essential for multinational firm’s management in today’s business market should start from knowing of volatile foreign exchange rates. Any appreciation of a currency relative value will bring exports decline or imports increase. All firms must understand foreign exchange risk in order to anticipate increased competition from imports or to realize increased opportunities for exports.
In July of the year 2005, China state announced it would immediately appreciate the RMB to the US dollar by 2.1% and...