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Assessing the CNH-CNY pricing differential: role of fundamentals, contagion and policy

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  • Michael Funke
  • Chang Shu
  • Xiaoqiang Cheng
  • Sercan Eraslan

Abstract

Renminbi internationalisation has brought about an active offshore market where the exchange rate frequently diverges from the onshore market. Using extended GARCH models, we explore the role of fundamentals, global factors and policies related to renminbi internationalisation in driving the pricing differential between the onshore and offshore exchange rates. Differences in the liquidity of the two markets play an important role in explaining the level of the differential, while rises in global risk aversion tend to increase the differential's volatility. On the policy front, measures permitting cross-border renminbi outflows have a particularly discernible impact in reducing the volatility of the pricing gap between the two markets.

Suggested Citation

  • Michael Funke & Chang Shu & Xiaoqiang Cheng & Sercan Eraslan, 2015. "Assessing the CNH-CNY pricing differential: role of fundamentals, contagion and policy," BIS Working Papers 492, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:492
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    Cited by:

    1. Yin-Wong Cheung & Cho-Hoi Hui & Andrew Tsang, 2016. "The Renminbi Central Parity: An Empirical Investigation," CESifo Working Paper Series 5963, CESifo Group Munich.
    2. repec:eee:jimfin:v:79:y:2017:i:c:p:189-202 is not listed on IDEAS
    3. Dong He & Paul Luk & Wenlang Zhang, 2016. "Internationalisation of the Renminbi as an Investing and a Funding Currency: Analytics and Prospects," Pacific Economic Review, Wiley Blackwell, vol. 21(3), pages 295-323, August.
    4. Robert N McCauley & Chang Shu, 2018. "Recent RMB policy and currency co-movements," BIS Working Papers 727, Bank for International Settlements.
    5. Qing, He & Korhonen, Iikka & Zongxin, Qian, 2017. "Monetary policy transmission with two exchange rates and a single currency : The Chinese experience," BOFIT Discussion Papers 14/2017, Bank of Finland, Institute for Economies in Transition.
    6. Liu, Tao, 2014. "The onshore-offshore interaction of RMB market: a high-frequency analysis," MPRA Paper 63905, University Library of Munich, Germany.
    7. Yin-Wong Cheung & Cho-Hoi Hui & Andrew Tsang, 2017. "The RMB Central Parity Formation Mechanism after August 2015: A Statistical Analysis," Working Papers 062017, Hong Kong Institute for Monetary Research.
    8. repec:eee:chieco:v:53:y:2019:i:c:p:30-52 is not listed on IDEAS
    9. repec:gam:jrisks:v:6:y:2018:i:4:p:120-:d:175263 is not listed on IDEAS
    10. repec:eee:intfin:v:49:y:2017:i:c:p:173-183 is not listed on IDEAS
    11. Lucía Cuadro-Sáez & Sonsoles Gallego, 2016. "Financial liberalisation in China: economic policy outlook and global implications," Economic Bulletin, Banco de España;Economic Bulletin Homepage, issue MAY, May.
    12. repec:eee:pacfin:v:49:y:2018:i:c:p:232-247 is not listed on IDEAS
    13. Rasmus Fatum & Yohei Yamamoto & Guozhong Zhu, 2016. "Is the Renminbi a Safe Haven?," Working Papers e109, Tokyo Center for Economic Research.
    14. repec:eee:glofin:v:37:y:2018:i:c:p:186-198 is not listed on IDEAS
    15. Yin-Wong CheungAuthor-Workplace-Name: City University of Hong Kong & Matthew S. Yiu, 2016. "Offshore Renminbi Trading: Findings from the 2013 BIS Triennial Central Bank Survey," Working Papers 142016, Hong Kong Institute for Monetary Research.
    16. Xu, Hai-Chuan & Zhou, Wei-Xing & Sornette, Didier, 2017. "Time-dependent lead-lag relationship between the onshore and offshore Renminbi exchange rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 49(C), pages 173-183.
    17. repec:eee:jimfin:v:86:y:2018:i:c:p:223-243 is not listed on IDEAS
    18. Fatum, Rasmus & Yamamoto, Yohei & Zhu, Guozhong, 2017. "Is the Renminbi a safe haven?," Journal of International Money and Finance, Elsevier, vol. 79(C), pages 189-202.
    19. Eraslan, Sercan, 2017. "Asymmetric arbitrage trading on offshore and onshore renminbi markets," Discussion Papers 13/2017, Deutsche Bundesbank.
    20. repec:eee:phsmap:v:503:y:2018:i:c:p:1030-1040 is not listed on IDEAS
    21. repec:eee:ecmode:v:75:y:2018:i:c:p:81-92 is not listed on IDEAS
    22. Kunze, Frederik & Basse, Tobias & Wegener, Christoph & Spiwoks, Markus, 2018. "The emergence of the RMB: A "New Normal" for China's exchange rate system?," Center for European, Governance and Economic Development Research Discussion Papers 348, University of Goettingen, Department of Economics.
    23. Cheung, Yin-Wong & Hui, Cho-Hoi & Tsang, Andrew, 2018. "The RMB central parity formation mechanism: August 2015 to December 2016," Journal of International Money and Finance, Elsevier, vol. 86(C), pages 223-243.
    24. Funke, Michael & Loermann, Julius & Tsang, Andrew, 2017. "The information content in the offshore Renminbi foreign-exchange option market : Analytics and implied USD/CNH densities," BOFIT Discussion Papers 15/2017, Bank of Finland, Institute for Economies in Transition.

    More about this item

    Keywords

    renminbi exchange rates; China; onshore and offshore markets; GARCH models;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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