The Influence Of RMB Offshore Arbitrage Space On Short-term Cross-board Capital Flow

Under the background that China's capital account has not yet been fully opened,the RMB offshore market has become an essential source of RMB assets and plays a key role in advancing the internationalization of the RMB.Due to the existence of different interest rates and exchange rates formation and control mechanisms between onshore and offshore markets,the resulting interest spreads and exchange rate differences provide space for cross-border arbitrage and may further trigger short-term capital flow,which creates an impact to the stability of the domestic currency system.This paper combines relevant theories and empirical analysis to study the influence of RMB offshore arbitrage space on short-term cross-board capital flow.After summarizing the realities of the development of the RMB offshore market in recent years,this paper compares the differences in the RMB trading mechanism between the onshore and offshore markets and analyzes the motivations and main approaches for offshore arbitrage.In order to explore the relation between RMB offshore arbitrage space and short-term cross-border capital flow,this paper builds an onshore-offshore capital competition model under risk conditions,which is based on the theory of interest rate parity,the Mundell-Fleming model,and multiple arbitrage model.On the basis of that capital competition model,this paper analyzes the possible influence of offshore-onshore interest spreads,exchange differences,asset prices,global risk aversion,and regulatory rigor on short-term cross-border capital flow.In order to verify the relation between RMB offshore arbitrage space and short-term cross-border capital flow obtained by theoretical analysis,this paper uses the monthly data from January 2012 to December 2017 to establish a state-space model with time-varying parameters and carries out three sets of empirical tests.Model One doesn't consider the impact that offshore arbitrage to short-term cross-border capital flow.Model Two considers that and focuses on the impacts interpreted by offshore-onshore spreads and exchange rate differences.Model three further optimizes the model which was applied to describe the relation between RMB offshore arbitrage and cross-border capital flow.Comprehensive analysis mainly leads to the following three conclusions.First,arbitrages based on interest spread,exchange rate differences and global risk aversion have a significant impact on short-term cross-border capital flow,while asset prices and regulatory rigor don't.Second,the interest spread and exchange rate differences between onshore and offshore markets,the expected devaluation of onshore RMB and the rising global risk aversion can promote short-term cross-border capital outflow.Finally,interest spread between offshore and onshore markets creates the greatest impact on short-term cross-border capital flow,and global risk aversion will also exert great influence while the impact of exchange rate differences is very limited.It would be better if we use the change of expected exchange rate of onshore RMB to reflect the impact of arbitrage based on exchange rate changes on cross-border capital flow.For the purpose of further studying which market is more proactive in the arbitrage space's movement,this paper uses the vector autoregressive model to examine the linkage and guiding relations of interest rates and exchange rates between offshore and onshore market.It was found that onshore interest rates guide offshore interest rates but offshore interest rates are difficult to produce substantial impact on onshore interest rates.Meanwhile,the exchange rates in onshore and offshore markets affect each other.Compared to the onshore exchange rates,the offshore exchange rates respond more quickly to new information and adjusts more quickly.