An Empirical Study Of Relationship Between The Onshore RMB And Offshore Exchange Rate

With the stabilization and recovery of the Chinese economy, the status of China’s economy continues to improve after global financial crisis. As an international currency, the status of RMB keeps strengthening. In this context, cross-border use of RMB presents an increasing trend. As a result, RMB offshore market leading by Hongkong has been basically formed. The development of RMB offshore market makes effect on pricing of financial products through varies ways, which poses challenges China enterprises, financial institutions, and regulatory authorities that are lack of experiences. Therefore, the study of relationship between offshore exchange rate and onshore exchange rate provides a theoretical basis for the completion of exchange rate system and stabilization of RMB exchange rate. Besides that, it enriches the research of offshore market, as well as providing theoretical reference for internationalization of RMB. On the other hand, as the relationship between offshore market and onshore market becomes closer and closer, there is an increased challenge for government to develop independent economic policies and effects of policies. Clear understanding of this relationship plays a practical role for China’s economic policy-making.This paper is divided into four parts:Part1introduces the background, purpose and significance of the research, research content and structure, as well as related research of the two market exchange rates; Part2establishes the Theoretical basis which enables the interaction between two exchange rates from arbitrage and market expectation perspectives. Part3researches the relationship between offshore exchange rate and onshore exchange rate based on the latest date. The research suggests that there is a positive relationship between offshore RMB spot market in Hong kong and onshore RMB spot rate. In addition, offshore RMB spot market in Hong kong drives the change of onshore RMB spot rate while the onshore RMB spot market acts as an information centre to offshore forward market; Part4indicates the related suggestions through the further analysis towards previous theory studies and test results.The understanding towards CNH market is within certain scale as it actives for a quite shore time. The quantitative researches regarding to onshore spot rate, offshore spot rate of RMB in Hong Kong and NDF exchange rate relationship are not comprehensive enough. As a response, this paper conducts empirical research regarding to the relationship between exchange rates of two different markets based on latest data. It reflects the latest situation of the offshore market more accurately.