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RMB Internationalization

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  • Samar Maziad
  • Joong Shik Kang
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    Abstract

    Among emerging market currencies, the RMB holds the most potential to become widely used internationally, due to China‘s large economic size, diversified trade structure and network, macroeconomic stability, and high growth rates - both current and expected. Yet, foreign access to RMB-denominated assets that could act as global stores of value remains limited due to extensive restrictions on capitals flows. At the same time, the rapid expansion of RMB trade settlement and issuance of RMB-denominated bonds by the Chinese government and corporates in Hong Kong, SAR have created some feedback channels across onshore (CNY) and offshore (CNH) RMB markets. We employed a bivariate GARCH model to understand the inter-linkages between onshore and offshore markets and found that, while developments in the onshore spot market exert an influence on the offshore spot market, offshore forward rates have a predictive impact on onshore forward rates. We also find evidence of volatility spillovers between two markets. Overtime, those spillover channels would be expected to grow as the offshore market further develops.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/133.

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    Length: 36
    Date of creation: 01 May 2012
    Date of revision:
    Handle: RePEc:imf:imfwpa:12/133

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    Keywords: Exchange rates; Financial stability; Offshore financial centers; exchange rate; forward market; bond; international currency; bonds; financial sector; foreign exchange; international currencies; financial markets; bond market; financial institutions; forward exchange rates; forward exchange; currency risk; bond proceeds; financial instruments; exchange rate movement; exchange reserves; denominated bonds; foreign exchange reserves; exchange markets; financial sector development; government bond; domestic financial markets; foreign exchange markets; financial system; exchange rate risk; financial market; currency convertibility; spot exchange rates; bond yield; exchange rate stability; secondary bond market; liquid liabilities; domestic capital market; reserve requirements; financial assets; domestic capital; financial repression; exchange rate volatility; treasury bonds; foreign exchange holdings; domestic financial system; sovereign bond; hedge; currency swaps; exchange rate movements; foreign exchange derivatives; bond holders; financial stocks; exchange rate risks; domestic financial institutions; financial services; stock market; deposit insurance; domestic financial sector; financial liberalization; currency markets; currency appreciation; foreign exchange law; fixed exchange rates; government bond yield; bond issuance; exchange rate management;

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    1. Barry Eichengreen & Marc Flandreau, 2008. "The Rise and Fall of the Dollar, or When Did the Dollar Replace Sterling as the Leading International Currency?," NBER Working Papers 14154, National Bureau of Economic Research, Inc.
    2. Chinn, Menzie David & Frankel, Jeffrey A., 2006. "Will the Euro Eventually Surpass the Dollar As Leading International Reserve Currency?," Santa Cruz Department of Economics, Working Paper Series qt4hz4n9pb, Department of Economics, UC Santa Cruz.
    3. Guonan Ma & RobertN McCauley, 2008. "Efficacy Of China'S Capital Controls: Evidence From Price And Flow Data," Pacific Economic Review, Wiley Blackwell, Wiley Blackwell, vol. 13(1), pages 104-123, 02.
    4. Robert McCauley, 2011. "Renminbi internationalisation and China's financial development," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, December.
    5. Takatoshi Ito & Satoshi Koibuchi & Kiyotaka Sato & Junko Shimizu, 2010. "Why has the yen failed to become a dominant invoicing currency in Asia? A firm-level analysis of Japanese Exporters' invoicing behavior," NBER Working Papers 16231, National Bureau of Economic Research, Inc.
    6. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 11(01), pages 122-150, February.
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    Cited by:
    1. Loechel, Horst & Packham, Natalie & Walisch, Fabian, 2013. "Determinants of the onshore and offshore Chinese Government yield curves," Frankfurt School - Working Paper Series 202, Frankfurt School of Finance and Management.
    2. Huang, Yiping & Wang, Daili & Fan, Gang, 2014. "Paths to a Reserve Currency: Internationalization of the Renminbi and Its Implications," ADBI Working Papers, Asian Development Bank Institute 482, Asian Development Bank Institute.

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