The Impact Of Onshore And Offshore Renminbi Interest Spreads On Cross-border Capital Flows

The renminbi offshore market opened on 2010. The cross-border trade settlement of renminbi lead to the internationalization of renminbi, facilitate the trade between on shore and off shore markets, meanwhile also brought a large number of arbitrage fraudulent trade practices from foreign trade enterprises by using foreign exchange loans and a letter of credit. These false trade motivates cross-border capital inflow through offshore market in the short run. The author tried to explain the surge of cross-border capital namely hot money by using the yuan in the offshore market (onshore) and Hong Kong’s monetary market interest rate spreads.By using the OLS estimates method, the author found the renminbi spreads can explain the phenomenon in cross-border capital inflows in the short term. The VAR model could simulate the dynamic process of cross-border capital inflows, onshore and offshore renminbi spreads, and foreign exchange loan and deposit difference. Using the granger causality test, the author found that under the condition of long-term dynamic process, the onshore and offshore renminbi spreads cannot explain the short-term cross-border capital inflows, the reason is that the government for capital account control, so in the long term spreads and cannot be directly lead to cross-border capital inflows.At the same time, the author found that in the long run the onshore and offshore renminbi spreads could expand foreign exchange loan and deposit the difference. It explains the cross-border capital flows into the territory of China by using false trade, namely trade enterprises using foreign exchange loan cycle opens in the way of transferring cross-border capital. Meaning on both sides of the bad loan may be directly affected by the spread, then empirically also supports this conjecture. There is a stable long-term relationship between both renminbi onshore and offshore spreads and foreign loan-to-deposit difference. Renminbi onshore and offshore spreads, the change of the current foreign exchange loan-to-deposit difference will have 10.63% correction on long-term equilibrium, namely, with 10.63% of the speed adjustment to long-term equilibrium condition, and not by the former 3 former onshore and offshore RMB loan-to-deposit spreads and foreign exchange balance.