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Cointegration and causality among the onshore and offshore markets for China's currency

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  • Owyong, David
  • Wong, Wing-Keung
  • Horowitz, Ira

Abstract

China has taken steps to develop offshore markets for renminbi trading and to liberalize exchange-rate determination in its onshore market. We examine the interaction between onshore and offshore markets with attention to how the interaction has been affected by widening of the onshore trading band first in April 2012 and further in March 2014. Ties between the onshore and offshore markets were closest before the first band widening and steadily loosened thereafter. We further study the cointegration and lead-lag effects between offshore and onshore spot and forward markets and show that there is a long-term equilibrium relationship between any pair of them. Our results suggest stronger causality running from the spot onshore rate to the spot offshore rate than vice versa. Between the spot and forward markets, there is evidence of bidirectional linear and nonlinear causality, which implies foreign impulses have had an influence on the domestic market.

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  • Owyong, David & Wong, Wing-Keung & Horowitz, Ira, 2015. "Cointegration and causality among the onshore and offshore markets for China's currency," Journal of Asian Economics, Elsevier, vol. 41(C), pages 20-38.
    • Handle: RePEc:eee:asieco:v:41:y:2015:i:c:p:20-38
    DOI: 10.1016/j.asieco.2015.10.004
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    More about this item

    Keywords

    RMB; Onshore and offshore markets; Spot and forward markets; Liberalization; Cointegration;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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