The Dynamic Interrelation And Pricing Power Among RMB On-shore And Off-shore Markets

The mistery of pricing power between offshore and onshore has been haunting the researcher of both at home and abroad. The market increase of RMB exchange rates since 2005 when China carried out exchange rate system reform, while continual market controls complicate the relationship between NDF and domestic RMB spot exchange rate market. Scholars have different opinions because of selecing different time interval. Some people think that there is no relation between onshore and offshore market. Some people think that there is closey connection among these markets. Some scholars regard onshore market lead offshore market, while some scholars have opposite view. Now the mainstream point is NDF market in Hongkong leads the onshore market and decides the RMB exchange rate. In order to accelerating the RMB internationalization, Chinese government is promoting the establishment of the offshore RMB financial market these year. On this background, CNH market in HongKong is introduced. Under policy support, CNH market developed fast since launched, the transation size of this marker is befarahead NDF market. This market not only offers more choices for traders of RMB, but also influences the relation between onshore and offershore market. As for whether this market can replace NDF market and contral the pricing right of the RMB exchange rate, thus reverse the status quo that our country’s foreign exchange market is losing the pricing power of RMB exchange, different scholars have different opinions. Based on this background, this paper explores mutual relations and pricing discovery of each market, and mainly analyzes the change of the relations after the launching of CNH market in order to ensure the pricing power allocation of RMB exchange rate.Based on the Interest-Rate-Parity、foreign exchange supply and demand theories the foreign exchange market information transmission and price discovery mechanism, this paper firstly launch a brief introduction to both of the offshore and onshore RMB markets; secondly the sample is divided into two parts based on the time node when the CNH market is formally founded, and in order to magnitude pricing discovery of each market preliminary, each is tested for Cointegration and Granger Causality to find the lead relations between these different RMB markets’ prices. Then we will use I-S model to find the pricing power of each market in order to ensure the pricing power allocation of RMB exchange rate immediately. In order to ensure the analysis accurately and comprehensively, this paper selects 4 different terms of forward products and the spot exchange rates to form data samples. The results show that no matter whether CNH market launch or not, there is close connection among the RMB onshore and offshore market. The onshore forward market is the center of information and the biggest contributors to RMB exchange rate in the short-term market, it controls the pricing power of RMB exchange rate. While in the long-term market, NDF market has an absolute advantage as an information center of RMB exchange rate and controls the pricing power of RMB exchange before the establishment of the CNH market. However this advantage was weakened after CNH market was formally founded, and there is a substitution effect of the CNH market for the NDF market and it also replace the NDF market to decide the RMB exchange rate formation among four markets. We also find that the pricing power of demestic spot market enhanced and local advantage of forward market is also revealed in the long-term market fter CNH market estabilished.According to the empirical results, the estabilishment of CNH market has certain effect. It not only strengthens the contact between RMB onshore and offshore markets, but also relieves the status quo that our country’s foreign exchange market is losing the pricing power of RMB exchange. So we need to encourage the development of CNH market continully through offering more convenient conditoins. As for the pricing power of long-term market is still controled by offshore market, so we also need to improve the exchange rate mechanism and function of exchange market in order to enhance the sensitivity of new information for onshore market. As the most variety market, developing the NDF market is also necessary for investors.