The Dyamic Interrelation Among RMB On-shore And Off-shore Markets

Recently, the internationalization of RMB is becoming an enthusiastically discussed topic in both theoretical and practical areas around the world. In order to promote the processing of RMB’s internationalization, Chinese government has issued a series of policies and measures, while the birth of offshore CNY market in Hong Kong (CNH) is an extremely important step among these measures. At the same time of enriching and improving the type of RMB market, in progress of RMB’s internationalization, whether the existence of CNH market reverse the status quo that our country’s foreign exchange market is suffering increasingly larger external shocks and losing the pricing power of RMB exchange? Based on this background, this paper explores mutual relations between the offshore and onshore RMB prices and mainly analyzes the change of the relations after the launching of CNH market.The paper summarizes previous research results on the basis of the forward exchange rate pricing theory, the foreign exchange market information transmission and price discovery mechanism, as well as the validity of the forward foreign exchange market theory. And then, we firstly launch a brief introduction and descriptive analysis to both of the offshore and onshore RMB markets; secondly,4different terms of forward products and the spot exchange rates have been chosen to form data samples; thirdly, the sample is divided into two parts based on the time node when the CNH market is formally founded, and each is tested for Cointegration and Granger Causality which are both relied on the Vector Auto Regression model (VAR) to find the linear compensation overflow relations and information flow direction among these different RMB markets. The results show that there do exist the price guidance relations between the onshore and offshore RMB markets. Before the establishment of the CNH market, the offshore NDF market has an absolute advantage as an information center of RMB exchange rate. However, this advantage was weakened after June2011when the CNH market was formally founded, and there is a substitution effect of the CNH market for the NDF market. According to the conclusion above, we finally put forward some suggestions and recommendations of both theoretical and practical significance to the construction of each RMB market. At the same time, some valuable guidance for market regulatory policy making and hedging strategy designing has also been mentioned in the last part of this paper.