IDEAS home Printed from https://ideas.repec.org/a/bla/chinae/v18y2010i2p96-120.html
   My bibliography  Save this article

Anomaly in China's Dollar–RMB Forward Market

Author

Listed:
  • Yi David Wang

Abstract

Newly‐established data on onshore deliverable US dollar–RMB forwards and the Shanghai Interbank Offered Rate from October 2006 to April 2009 reveal significant violations of covered interest rate parity. This paper explains the cause of this anomaly. Deviations in the forward market are caused by an increase in US dollar‐to‐RMB conversion restrictions. Given that Chinese monetary authorities want to prevent market participants from taking advantage of the predictable appreciation of the RMB, China's State Administration of Foreign Exchange has to tighten up the control on US dollar‐to‐RMB conversions. Under the tightened conversion restrictions, similar deviations will resurface in the forward market whenever hot money inflow increases. One way to avoid covered interest rate parity violations in the forward market is to decrease hot money inflow into China by maintaining a stable and credible exchange rate policy.

Suggested Citation

  • Yi David Wang, 2010. "Anomaly in China's Dollar–RMB Forward Market," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 18(2), pages 96-120, March.
    • Handle: RePEc:bla:chinae:v:18:y:2010:i:2:p:96-120
    DOI: 10.1111/j.1749-124X.2010.01191.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1749-124X.2010.01191.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1749-124X.2010.01191.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. John B. Taylor & John C. Williams, 2009. "A black swan in the money market," Proceedings, Federal Reserve Bank of San Francisco, issue Jan.
    2. Ronald McKinnon & Gunther Schnabl, 2009. "The Case for Stabilizing China's Exchange Rate: Setting the Stage for Fiscal Expansion," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 17(1), pages 1-32, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yanping Zhao & Zaghum Umar & Xuan Vinh Vo, 2021. "Return and volatility connectedness of Chinese onshore, offshore, and forward exchange rate," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(11), pages 1843-1860, November.
    2. Wang, Yi David, 2012. "Convertibility restriction in China s foreign exchange market and its impact on forward pricing," BOFIT Discussion Papers 28/2012, Bank of Finland, Institute for Economies in Transition.
    3. repec:zbw:bofitp:2012_028 is not listed on IDEAS
    4. Wang, Yi David, 2015. "Convertibility restriction in China’s foreign exchange market and its impact on forward pricing," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 616-631.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kui-Wai Li, 2013. "The US monetary performance prior to the 2008 crisis," Applied Economics, Taylor & Francis Journals, vol. 45(24), pages 3450-3461, August.
    2. Geršl, Adam & Lešanovská, Jitka, 2014. "Explaining the Czech interbank market risk premium," Economic Systems, Elsevier, vol. 38(4), pages 536-551.
    3. Claudia Buch & Catherine Koch & Michael Koetter, 2016. "Crises and rescues: liquidity transmission through international banks," BIS Working Papers 576, Bank for International Settlements.
    4. Lawrence Christiano & Daisuke Ikeda, 2011. "Government Policy, Credit Markets and Economic Activity," NBER Working Papers 17142, National Bureau of Economic Research, Inc.
    5. Kyle D. Allen & Drew B. Winters, 2021. "Auditor response to changing risk: money market funds during the financial crisis," Review of Quantitative Finance and Accounting, Springer, vol. 56(3), pages 1057-1086, April.
    6. Acharya, Viral V. & Skeie, David, 2011. "A model of liquidity hoarding and term premia in inter-bank markets," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 436-447.
    7. Cheung, Yin-Wong (ed.), 2012. "The Evolving Role of China in the Global Economy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262018234, December.
    8. Cécile Bastidon, 2013. "Un modèle théorique d'intermédiation : transmission et gestion des chocs," Post-Print hal-00806524, HAL.
    9. Duca, John V., 2013. "Did the commercial paper funding facility prevent a Great Depression style money market meltdown?," Journal of Financial Stability, Elsevier, vol. 9(4), pages 747-758.
    10. Ciner, Cetin, 2011. "Eurocurrency interest rate linkages: A frequency domain analysis," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 498-505, October.
    11. Gunther Schnabl, 2012. "Monetary Policy Reform in a World of Central Banks," Global Financial Markets Working Paper Series 26-2012, Friedrich-Schiller-University Jena.
    12. Schnabl, Gunther, 2013. "The global move into the zero interest rate and high debt trap," Working Papers 121, University of Leipzig, Faculty of Economics and Management Science.
    13. Jinzhao Chen, 2012. "Crisis, Capital Controls and Covered Interest Parity: Evidence from China in Transformation," PSE Working Papers halshs-00660654, HAL.
    14. Nguyen, Minh, 2020. "Collateral haircuts and bond yields in the European government bond markets," International Review of Financial Analysis, Elsevier, vol. 69(C).
    15. Lazopoulos, Ioannis & Gabriel, Vasco, 2019. "Policy mandates and institutional architecture," Journal of Banking & Finance, Elsevier, vol. 100(C), pages 122-134.
    16. Guillermo Andrés Cangrejo Jiménez, 2014. "La Estructura a Plazos del Riesgo Interbancario," Documentos de Trabajo 12172, Universidad del Rosario.
    17. repec:onb:oenbwp:y::i:152:b:1 is not listed on IDEAS
    18. Hattori, Takahiro, 2023. "The premium and settlement of CCPs during the financial crisis: Evidence from the JGB market," Journal of International Money and Finance, Elsevier, vol. 132(C).
    19. Maria Näther, 2019. "The effect of the central bank’s standing facilities on interbank lending and bank liquidity holding," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 68(3), pages 537-577, October.
    20. Adams-Kane, Jonathon & Jia, Yueqing & Lim, Jamus Jerome, 2015. "Global transmission channels for international bank lending in the 2007–09 financial crisist," Journal of International Money and Finance, Elsevier, vol. 56(C), pages 97-113.
    21. Vespignani, Joaquin L. & Ratti, Ronald A., 2016. "Not all international monetary shocks are alike for the Japanese economy," Economic Modelling, Elsevier, vol. 52(PB), pages 822-837.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:chinae:v:18:y:2010:i:2:p:96-120. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/iwepacn.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.