When Exchange Rate Volatility Becomes Supply Chain Risk: Evidence from Chinese Listed Firms

Abstract

Amid the profound restructuring of global value chains, supply chain risk has mainly been linked to visible shocks such as pandemics, wars, and geopolitical conflict. Much less is known, however, about whether exchange rate volatility can become a source of operational instability within firms. We examine this question using Chinese A-share listed firms from 2007 to 2021. We construct an industry-level exchange rate volatility measure by combining ADB input–output tables with bilateral real exchange rate volatility, and measure firms’ perceived and disclosed supply chain disruption risk from the MD&A sections of annual reports using a word-embedding approach. We find that higher industry-level exchange rate volatility is associated with a significant increase in firms’ perceived and disclosed supply chain disruption risk. The mechanism evidence indicates that this effect operates through both supply-side operating frictions and demand-side pressure: higher industry-level exchange rate volatility reduces inventory turnover and weakens overseas revenue realization. The effect is weaker in industries with longer backward production length but stronger among firms facing tighter financing constraints. It is also stronger among firms located in more open regions, firms with overseas-experienced executives, and firms with greater export intensity, but weaker among manufacturing firms. These findings extend research on the real effects of exchange rate volatility by showing how industry-level exchange rate uncertainty can materialize as firm-level perceived and disclosed supply chain disruption risk and undermine the operational continuity and long-term economic sustainability of internationally connected supply chains.