A Study Of The Relationship Of Exchange Rates In China Mainland, Hongkong And Taiwan

The internationalization of RMB is an inevitable but gradual process, as China being the second economy. China had an exchange rate reform in July,2005. Then offshore RMB business was carried out in Hongkong in 2010. Two years later China mainland and Taiwan made a deal in monetary settlement. All these measures make the business in Greater China more frequent and unobstructed.This papper explores the relationship of exchange rates among China mainland, Taiwan and Hongkong, by building a VAR model and conducting a series of analyses. Three parts are included in our empirical study. In the first empirical part, this papper make a comparative analysis of relationship of exchange rates in three districts before exchange rate reform and after. The second empirical part shows the newest relationship of exchange rates in three districts. And the last empirical part analyzes the exchange rate synchronicity of Taiwan and Hongkong.By doing the empirical analyses, this papper finds the following results. The first, exchange rate reform of RMB made a stronger correlation of exchange rate return among China mainland, Taiwan and Hongkong. After the RMB exchange rate reform, CNY exchange rate return leads the retrun of HKD and TWD more significantly. At the same time, returns of HKD and TWD exchange rate lead the return of CNY more significantly, too. The second, the analysis of recent two years’daily data shows that HKD exchange rate return influences the return of CNY exchange rate significantly. And the other way round, CNY exchange rate return make no significant effect on HKD. While HKD and TWD are both each other’s granger cause. HKD exchange rate influences CNY exchange rate more than TWD does. TWD influences HKD more than CNY does. CNY influences TWD more than HKD does. In the whole system, CNY exchange rate is the most independent member, being affected little by the HKD and TWD. The exchange rate of TWD and HKD share a higher synchronicity when against CNY than against USD. So offshore RMB business makes these two exchange rate markets more relevant.