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The Chinese Economies in Global Context: The Integration Process and Its Determinants

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  • Yin-Wong Cheung
  • Menzie D. Chinn
  • Eiji Fujii

Abstract

The linkages between the People's Republic of China (PRC) and the other Chinese economies of Hong Kong and Taiwan are assessed, and compared against those with Japan and the US. We first characterize the time series behavior of variables corresponding to three criteria of integration, namely real interest parity, uncovered interest parity, and relative purchasing power parity. There is evidence that these parity conditions tend to hold over longer periods between the PRC and all other economies, although they do not hold instantaneously. In general, the magnitude of the deviations from the parity conditions is shrinking over time. Overall, however, Hong Kong exhibits indications of a more advanced level of integration with the PRC. We also find that evidence is surprisingly positive for integration with the US. We then turn to examining the determinants of the degree of integration. Regression results suggest that the degrees of financial and real integration depend upon the extent of capital controls, foreign direct investment linkages, as well as the magnitude of exchange rate volatility.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10047.

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Date of creation: Oct 2003
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Publication status: published as Cheung, Yin-Wong, Menzie D. Chinn and Eiji Fujii. "The Chinese Economies In Global Context: The Integration Process And Its Determinants," Journal of the Japanese and International Economies, 2006, v20(1,Mar), 128-153.
Handle: RePEc:nbr:nberwo:10047

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Cited by:
  1. repec:hal:cesptp:halshs-00111153 is not listed on IDEAS
  2. Pasricha, Gurnain, 2007. "Financial Integration in Emerging Market Economies," MPRA Paper 5278, University Library of Munich, Germany.
  3. Hiroshi Fujiki & nd Akiko Terada-Hagiwara, 2007. "Financial Integration in East Asia," IMES Discussion Paper Series 07-E-12, Institute for Monetary and Economic Studies, Bank of Japan.
  4. Liew, Venus Khim-Sen & Ling, Tai-Hu, 2008. "Real interest rate parity: evidence from East Asian economies relative to China," MPRA Paper 7291, University Library of Munich, Germany.
  5. Jorge Selaive & Beatriz Velásquez & José Miguel Villena, 2008. "Extended Measures of Capital Transactions," Working Papers Central Bank of Chile 461, Central Bank of Chile.
  6. Guglielmo Maria Caporale & Michael Donadelli & Alessia Varani, 2014. "International Capital Markets Structure, Preferences and Puzzles: The US-China Case," Discussion Papers of DIW Berlin 1362, DIW Berlin, German Institute for Economic Research.
  7. Yu, Ip-Wing & Fung, Kang-Por & Tam, Chi-Sang, 2010. "Assessing financial market integration in Asia - Equity markets," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 2874-2885, December.
  8. Kim, Heeho, 2011. "The risk adjusted uncovered equity parity," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1491-1505.
  9. R. Kohli, . "India's Experience in Navigating the Trilemma: Do Capital Controls Help?," Indian Council for Research on International Economic Relations, New Delhi Working Papers 257, Indian Council for Research on International Economic Relations, New Delhi, India.
  10. repec:hal:wpaper:halshs-00660654 is not listed on IDEAS
  11. Ito, Hiro, 2006. "Financial development and financial liberalization in Asia: Thresholds, institutions and the sequence of liberalization," The North American Journal of Economics and Finance, Elsevier, vol. 17(3), pages 303-327, December.
  12. Yin-Wong Cheung & Risto Herrala, 2013. "China's Capital Controls - Through the Prism of Covered Interest Differentials," Working Papers 142013, Hong Kong Institute for Monetary Research.
  13. Vincent Bouvatier, 2010. "Hot money inflows and monetary stability in China: how the People's Bank of China took up the challenge," Applied Economics, Taylor & Francis Journals, vol. 42(12), pages 1533-1548.
  14. Li-Gang Liu, 2005. "China'S Role In The Current Global Economic Imbalance," Discussion papers 05010, Research Institute of Economy, Trade and Industry (RIETI).
  15. Vincent Bouvatier, 2006. "Hot money inflows in China : How the people's bank of China took up the challenge," Cahiers de la Maison des Sciences Economiques bla06011, Université Panthéon-Sorbonne (Paris 1).
  16. Valérie Mignon & Amina Lahrèche-Révil & Agnès Bénassy-Quéré, 2004. "Le yuan et le G20," Revue d'Économie Financière, Programme National Persée, vol. 77(4), pages 127-146.
  17. Lee, Chin, 2010. "Purchasing power parity and free trade area," MPRA Paper 40431, University Library of Munich, Germany.

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