Relationshiop Between China’s Foreign Exchange Market

The subject of the onshore forward exchange rate and NDF exchange rate of the same period are the future of the spot rate at some point. However,due to exchange rate controls and capital controls, onshore forward market and NDF market are separated and the price of the spot,onshore forward and NDF markets differ. In the long run, the three prices are impacted by each other and the price differences remain within a certain range. For market participants, understanding the interaction between the three market can help them forecast effectively thus predict in advance,avoid the risk or arbitrage. This makes the study of the relationship between spot market, onshore forward market and NDF market has important practical significance.This paper describes the history and development of the RMB/USD spot market, offshore NDF forward market and onshore forward market, pricing mechanism and the transmission mechanism.In empirical study, this paper selects the most active trading 1 month,3 months,6 months,12 months four term forward rate as sample,from October 2005 to July 2013 as the research section,use ARDL model checking mean spillover effect, MGARCH-BEKK model checking volatility spillover effect.The statistics results show that:not only within the onshore forward rate and the spot rate of long-term equilibrium relationship, but they also exist with offshore Renminbi NDF long-term equilibrium relationship. Compared to the NDF rates, onshore forward rate and the spot rate have more interaction, the forward rate for each period is the guide to spot exchange rate rather than NDF rate. Interaction between onshore and offshore foreign exchange market, there exist causality from onshore forward rate to NDF rate. A volatility spillover effect exists in both directions between onshore spot and forward market; volatility spillover effect exists from onshore forward market to the NDF market but not vice verse; volatility spillover effect exists from the spot to the NDF market but not vice verse.This suggests that, in the time interval we studied, especially after the central bank implementing a series of measures, onshore forward exchange market has developed rapaidly, as well as NDF market is limit because domestic financial institutions are prohibited from trading NDF, onshore forward market shows the tendency to become the center of forward rate exchange information transmission center.