Spillover Effect in the RMB Foreign Exchange Market:Based on VAR and DCC-MVGARCH Models

This paper analyzes the stability and marketization of the RMB exchange rate after China introduced the foreign exchange rate reform by linking the RMB exchange rate with the offshore and onshore markets on August 11,2015(“8/11”).Under the framework of dynamic analysis,through Granger causality test,VAR model and DCC-MVGARCH model,the empirical analysis is conducted about the three market exchange rate linkages of CNY,NDF and CNH from May 2012 to December 2018.Then,the direction and degree of the linkage between the RMB’s offshore and onshore exchange rates before and after the“8/11”exchange rate reform are compared.The research results show that:(1)since the“8/11”exchange rate reform,the RMB exchange rate has become more flexible;(2)the price-determining power of the RMB exchange rate may be weakened,and policy adjustment should take effect;and(3)the prerequisites,under which the offshore market can play a role,are the development of the market itself.This paper proposes that:(1)the onshore and offshore markets should develop in a collaborative manner to further increase exchange rate elasticity and flexibility;(2)close attention should be paid to the relationship between the offshore and onshore markets,and policy determination and flexibility should be maintained;and(3)the offshore market should be improved and play a due role.

A Hybrid Approach for Studying the Lead-Lag Relationships Between China’s Onshore and Offshore Exchange Rates Considering the Impact of Extreme Events

Understanding the characteristics of the dynamic relationship between the onshore Ren- minbi （CNY） and the offshore Renminbi （CNH） exchange rates considering the impact of some extreme events is very important and it has wide implications in several areas such as hedging. For better esti- mating the dynamic relationship between CNY and CNH, the Granger-causality test and Bry-Boschan Business Cycle Dating Algorithm were employed in this paper. Due to the intrinsic complexity of the lead-lag relationships between CNY and CNH, the empirical mode decomposition （EMD） algorithm is used to decompose those time series data into several intrinsic mode function （IMF） components and a residual sequence, from high to low frequency. Based on the frequencies, the IMFs and a residual sequence are combined into three components, identified as short-term composition caused by some market activities, medium-term composition caused by some extreme events and the long-term trend.The empirical results indicate that when it only matters the short-term market activities, CNH always leads CNY; while the medium-term impact caused by those extreme events may alternate the lead-lag relationships between CNY and CNH.

Renminbi Derivatives: Recent Development and Issues

This study reviews the developments in markets. The onshore market has seen a the onshore and offshore renminbi derivatives rapid build-up in the market infrastructure and price discovery mechanism in the past year, with empirical evidence suggesting that its pricing is increasingly determined by financial fundamentals, such as the covered interest rate parity. However, the growth of the market has been restrained by restrictions on the participant base, limited variations in the RMB/US$ exchange rate, market participants＇ lack of technical capacity and experience, and inadequate supporting financial market infrastructure. The non-deliverable forward （NDF） market, concentrated in Hong Kong and Singapore, is more developed, but has the drawback that its pricing is not tied to financial fundamentals. The comparison between onshore and offshore markets suggests that two issues are of particular importance for future derivatives market development in China： the balance between regulation and development, and the relationship between onshore and offshore markets.

Are Offshore RMB Arrangements the Basis for a Long-term Exchange Rate System without Convertibility?

This paper discusses China＇s relatively new structure of dual onshore and offshore RMB markets. Its distinguishingJeature is both offshore trading at exchange rates that are market determined and onshore trading at exchange rates anchored at the official spot rate with capital account inconvertibility. We note that thus far the CNH and CNY spot rates have largely tracked each other, suggesting that the shadow priee on the convertibility constraint onshore and also the offshore diversification benefit is close to zero. However, this could change in the future. We discuss the potentialJbr the offshore RMB market to grow with trade settlement and bilateral ,swap arrangements in RMB, which would provide a big enough pool ofliquidityforthe RMB to become a vehicle currency and reserve c^rrency. These potential developments will be restrained by onshore inconvertibility, but moving to convertibility seemingly implies major change in China ＂s financial structure and the offshore RMB arrangements are only a small first step along this path. Crucial in this evolution of arrangements will be fi^ture Chinese growth performance and the relative attractiveness of onshore inconvertible but offshore marketable RA4B relative to the debt laden and slow growth currencies of the USA, the EU and Japan.