Research On The CNH-CNY Spread And Monetary Policy Choice From The Perspective Of Counter-Cyclical Factor

As the general focus of academic circles,monetary authorities and market players,the RMB exchange rate will have a profound impact on the development of global trade,investment and foreign-related business.In the current context of the continuous development of the RMB offshore market and the continuous advancement of the internationalization of the RMB,the CNH-CNY spread caused by the relative fragmentation of the offshore and onshore markets has become an important inducement for the instability of the foreign exchange market and the fluctuation of the RMB exchange rate.Especially after the 2008 financial crisis,the implementation of unconventional monetary policies in developed economies caused the offshore RMB exchange rate(CNH)to fluctuate around the onshore RMB exchange rate(CNY).This will not only affect the stability of the RMB exchange rate,but also adversely affect China’s monetary policy and financial stability.The goal of the exchange rate reform and regulation of the People’s Bank of China is to maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.Therefore,in order to slow down the fluctuation of the RMB exchange rate and maintain the normal order of the foreign exchange market,the People’s Bank of China needs to actively manage the RMB exchange rate to stabilize the CNH-CNY spread.Based on the actual situation and characteristics of the People’s Bank of China’s exchange rate regulation,this paper attempts to systematically study the influence mechanism of the CNH-CNY spread and the monetary policy choice of the People’s Bank of China from the perspective of counter-cyclical factor.The full text revolves around three aspects: First,does counter-cyclical factor help to stabilize the CNHCNY spread? Secondly,from the perspective of bank risk-taking channels,we study how counter-cyclical factor and the CNH-CNY spread affect the risk-taking behavior of commercial banks.Finally,as an extended analysis,under the framework of the open economy DSGE model,this paper studies whether RMB exchange rate should be included in the monetary policy objectives of the People’s Bank of China.This paper is divided into six chapters: Chapter 1 is the introduction.Which introduces the background and research significance of this paper,the definition of main concepts,research content and methods,as well as the main innovations of this paper.Chapter 2 is the literature review.Which briefly reviews the theoretical and empirical studies related to exchange rate determination and fluctuation,systematically sorts out the relationship between the offshore and onshore RMB exchange rates,and analyzes the influencing factors of the CNH-CNY spread.Then,it deeply analyzes the main methods,transmission channels and influence effects of the central bank’s exchange rate management.Chapter 3 focuses on the impact of counter-cyclical factor on the CNH-CNY spread and its fluctuation behavior.Based on the transmission mechanism of the offshore and onshore RMB exchange rates,a theoretical model under frictionless market conditions is constructed to explain the theoretical mechanism of counter-cyclical factor affecting the CNH-CNY spread.At the same time,an econometric model is established to empirically analyze the effect of counter-cyclical factor on the CNH-CNY spread and its fluctuation behavior.Chapter 4 comprehensively examines the impact of counter-cyclical factor and the CNH-CNY spread on commercial banks’ risk-taking behavior.Based on the institutional background of counter-cyclical factor and the typical characteristics of commercial banks,theoretical mechanisms and research hypotheses are proposed.Constructing an econometric model to empirically analyze the effects of countercyclical factor and the CNH-CNY spread on commercial banks’ risk-taking.This paper focuses on exploring the heterogeneous effects of counter-cyclical factor on the risk-taking behavior of commercial banks and their causes,and analyzes the mechanism of counter-cyclical factor on the CNH-CNY spread.Chapter 5 examines whether the RMB exchange rate should be included in the central bank’s monetary policy objective from the perspective of monetary policy choice.Based on the mixed policy rules of China’s monetary policy operation practice,this paper constructs a dynamic stochastic general equilibrium model in an open economic environment,and studies whether the RMB exchange rate should be included in its policy rules by comparing the effects of monetary policy under different policy rules.At the same time,the DSGE model based on mixed rules explores the regulation efficiency of the People’s Bank of China’s monetary policy on the RMB exchange rate.Chapter6 is a summary of the full text.Which summarize the main research results,get the corresponding policy inspiration,point out the insufficiency of the research,and look forward to the next research direction.The main research conclusions of this paper are reflected in the following three aspects:(1)The counter-cyclical factor helps to stabilize the CNH-CNY spread and its volatility.The theoretical model shows that the influence mechanism of the counter-cyclical factor on the CNH-CNY spread is realized through the behavior of market players such as commercial banks.In the face of counter-cyclical factor policies,commercial banks actively or passively change their foreign exchange asset-liability structure,which in turn affects the supply and demand of foreign exchange funds in both the offshore and onshore markets.And through different degrees of influence on the offshore and onshore RMB exchange rates,to achieve the purpose of regulating the CNH-CNY spread.The empirical results show that the counter-cyclical factor can not only effectively restrain the CNH-CNY spread,but also effectively reduce the fluctuation range of the CNH-CNY spread.Even in the face of the major uncertain impact of Sino-US economic and trade frictions,the empirical conclusions are still robust.At the same time,the impact of the countercyclical factor on the CNH-CNY spread is significant and asymmetric.In the case of RMB depreciation,the counter-cyclical factor can significantly restrain the CNHCNY spread and reduce the volatility of the spread.However,in the case of RMB appreciation,the counter-cyclical factor policy can only reduce the fluctuation range of the spread,but does not help to restrain the CNH-CNY spread,and has not yet exerted its counter-cyclical control policy effect.(2)The counter-cyclical factor alleviated the currency mismatch of commercial banks to a certain extent by reducing the risk-taking of commercial banks,and stabilized the CNH-CNY spread by adjusting the supply and demand of funds in the offshore and onshore markets.On the one hand,counter-cyclical factor affects the RMB exchange rate expectations of market players by changing the center of the RMB exchange rate.The counter-cyclical factor reduces the risk-taking of commercial banks and changes the commercial banks’ domestic and foreign asset allocation,thereby affecting the supply and demand of funds in the offshore and onshore markets,and finally achieves the purpose of stabilizing the CNH-CNY spread.On the other hand,the CNH-CNY spread provides commercial banks with a risk-free cross-border arbitrage opportunity.When the CNH-CNY spread increases,commercial banks have an incentive to manipulate the use of funds in both offshore and onshore markets to maximise expected returns.In addition,there is significant heterogeneity in the impact of counter-cyclical factor on the risk-taking of commercial banks.From the perspective of the heterogeneity of market makers,the counter-cyclical factor significantly reduces the exchange rate risk-taking behavior of market-making banks,since the counter-cyclical factor is reflected by the quotation behavior of market-making banks,market-making banks have more information advantages than non-market-making banks.In terms of types of commercial banks,the risk-taking channels of counter-cyclical factor are mainly transmitted through joint-stock commercial banks and large commercial banks.This is due to the low sensitivity of city commercial banks to the foreign exchange market,which affects the effect of counter-cyclical factor to a certain extent.(3)The monetary policy of the People’s Bank of China has a significant regulatory effect on the RMB exchange rate,and the exchange rate transmission mechanism is relatively smooth.Since maintaining the stability of the currency value and thereby promoting economic growth is the goal of China’s monetary policy.Therefore,the stability of the external price of RMB(that is,the RMB exchange rate)has naturally become one of the goals of China’s monetary policy,and the People’s Bank of China should take the RMB exchange rate into consideration in monetary policy rules.When the People’s Bank of China implements monetary policy to manage the RMB exchange rate,different types of monetary policy rules have different effects on the RMB exchange rate.Compared with the simple monetary growth rule or the Taylor rule,the mixed monetary policy is more effective in regulating the RMB exchange rate.The possible innovations and contributions of this paper are reflected in the following three aspects:(1)The innovation of research perspective.First of all,this paper chooses the counter-cyclical factor as the research perspective,which is an innovative point in the selection of the entry point for the theoretical study of the CNH-CNY spread.The existing research has not theoretically explored the economic formation mechanism behind the counter-cyclical factor,and the analysis of the impact mechanism of the CNH-CNY spread is not in-depth and systematic.By focusing on the counter-cyclical adjustment characteristics of the counter-cyclical factor,this paper clearly explains the influence mechanism of the counter-cyclical factor on the CNH-CNY spread in theory,and empirically tests the effect of the counter-cyclical factor on the CNH-CNY spread in detail.Secondly,through the research on the risktaking channels of banks based on monetary policy,this paper expands the observation scope of the research on the influence mechanism of counter-cyclical factor on the CNH-CNY spread.Domestic experts and scholars mainly focus on the impact of counter-cyclical factor on the RMB exchange rate,but generally ignore the influence of counter-cyclical factor on the risk-taking behavior of commercial banks.This paper attempts to examine the influence mechanism of the countercyclical factor on the CNH-CNY spread from the perspective of commercial banks’ risk-taking.(2)The innovation of theoretical model.First of all,in terms of the macro mechanism of monetary policy affecting RMB exchange rate,based on the dynamic stochastic general equilibrium(DSGE)framework of the open economy,this paper constructs a theoretical model of mixed monetary policy rules suitable for China’s national conditions.Different from existing studies,this model takes positive trend inflation into account and is closer to the reality.At the same time,by comparing the differences in the macro-control effects of DSGE models of different types of monetary policy rules,this paper discusses whether the People’s Bank of China incorporates the RMB exchange rate into its policy rules,and tests the potential impact of monetary policy on RMB exchange rate.Secondly,in terms of the micro mechanism of counter-cyclical factor affecting the CNH-CNY spread,based on the transmission mechanism of the offshore and onshore RMB exchange rates under frictionless market conditions,this paper constructed a theoretical model including four types of economic entities: commercial banks,enterprises,investors and central banks,and analyzed the influence mechanism of counter-cyclical factor on the CNH-CNY spread.It is revealed that the adjustment of commercial banks’ foreign exchange assets is the main form of the counter-cyclical factor affecting the CNHCNY spread.(3)The innovation of empirical application.First of all,the influence of counter-cyclical factor on the CNH-CNY spread and spread fluctuation is proved.It is found that the counter-cyclical factor can effectively restrain the CNH-CNY spread and significantly reduce the fluctuation range of the spread.In the case of RMB appreciation and depreciation,the effect of counter-cyclical factor on the adjustment of the CNH-CNY spread is obviously asymmetrical.Secondly,we find micro-empirical evidence that counter-cyclical factor influences the risk-taking of commercial banks.This paper is the first to examine the policy effect of countercyclical factor from the perspective of risk-taking of commercial banks.It not only enriched the theories related to the channel of bank risk-taking of monetary policy,but also provided beneficial enlightenment for the formulation and implementation of China’s exchange rate policy.At the same time,by distinguishing the nature and types of commercial banks,the heterogeneity of counter-cyclical factor on the risktaking of commercial banks is further confirmed.