A Theoretical And Empirical Study On The Impact Factors Of The CNY-CNH Pricing Differential

To promote the further development of Hong Kong’s offshore RMB market, consolidate its position as an offshore RMB center, the Hong Kong Capital Markets Association began issuing offshore RMB spot exchange rate fixing price since June 27, 2011.But there is significant differential between the onshore exchange rates and the offshore spot exchange rate since its introduction.Huge differential between the onshore and offshore exchange rates gave birth to a series of problems, such as the cross-border arbitrage, and produced a lot of negative effects on capital flows, construction of RMB offshore financial center, effectiveness and independence of monetary policy and financial stability of our country. Meanwhile, as the world’s fourth largest payment currency, the third weight of the Special Drawing Rights basket currency, the feature that there IS significant differential between the onshore and offshore exchange rates is not available in other currencies. Therefore, this issue is causing great concern in the financial sector. The research on the special status of the CNY-CNH pricing differential and its volatility has important theoretical and practical significance.The CNY-CNH pricing differential is a prices differences caused by institutional differences. Its trend presents three major characteristics, namely, the pricing differential is significant, the differential exists for a long time and the differential’s volatility is obvious. The characteristic “the pricing differential is significant” and “the differential exists for a long time” are due to the differences in the institutional mechanisms between the onshore and offshore market, namely differences formation mechanism of the exchange rate, interest rate differential formed by different clearing channels, market segmentation caused by capital controls. The market liquidity in the offshore market, expectations of the future trend of the RMB, policy launched by the People’s Bank of China and the sentiment of the international financial market are the main factors that cause the fluctuations of the CNY-CNH pricing differential.After verifying that the CNY-CNH pricing differential exhibit volatility clustering characteristics, this paper constructed GARCH(1, 1) model and introduced the above factors as exogenous variables into the conditional variance equations to study the volatility characteristics of the CNY-CNH pricing differential. The results show that Hong Kong’s RMB interbank overnight interest rate, the expectations of the future trend of the RMB, the volatility Index of S&P 500 index options, US five-year swap rates are all positively related to the volatility of the CNY-CNH pricing differential. Policies to promote capital account liberalization significantly reduce the volatility of the CNY-CNH pricing differential, while the policies that expand the onshore RMB exchange rate fluctuation range actually raise the volatility of the CNY-CNH pricing differential. The empirical results also show that the CNY-CNH pricing differential exists automatic convergence mechanism and the integration between onshore and offshore market has begun to take shape, but the degree of integration is still low.According to the above conclusions, we can see that the most fundamental mean of reducing and eliminating the CNY-CNH pricing differential is to realize the high level integration between onshore and offshore market. To achieve this goal, the most important work for the onshore market is to continue to promote the reform of the RMB exchange rate by giving full play to the market price discovery function and emphasizing the coordination of the use of the policy, eliminate the institutional difference; At the same time, emphasizing the concept of “open development”, reducing capital control through the active connect with the international financial market, balancing the "going out" and "flow back" of RMB, continuing to promote the high level and two-way open of the capital projects. For the offshore market, the main task is to enhance the liquidity of offshore RMB market and make the offshore market bigger and deeper through the joint efforts of the central government and the SAR government.