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The RMB Central Parity Formation Mechanism: August 2015 to December 2016

Author

Listed:
  • Yin-Wong Cheung

    (City University of Hong Kong)

  • Cho-Hoi Hui

    (Hong Kong Monetary Authority)

  • Andrew Tsang

    (Hong Kong Monetary Authority)

Abstract

We study the renminbi (RMB) central parity formation mechanism following the August 2015 reform using statistical models. We identify the roles of the onshore and offshore RMB exchange rates and the US dollar index in determining the central parity in a linear regression framework. The effect of the RMB currency basket index, however, is revealed after controlling for multiplicative offshore RMB volatility effects. The offshore RMB volatility exerts a dampening effect on the links between the central parity and its determinants. In the prediction comparison exercise, the three selected models statistically outperform the random walk benchmark. Among these four models, the selected multiplicative specification yields the smallest root-mean squared prediction error and mean absolute prediction error.

Suggested Citation

  • Yin-Wong Cheung & Cho-Hoi Hui & Andrew Tsang, 2018. "The RMB Central Parity Formation Mechanism: August 2015 to December 2016," GRU Working Paper Series GRU_2018_010, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    • Handle: RePEc:cth:wpaper:gru_2018_010
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    2. Dai, Yixin & Yu, Cong & Xu, Xiangyun & Zhou, Jindie & Teng, Fengfan, 2024. "The macro driving factors of co-movement of RMB with other currencies in FX markets," International Review of Financial Analysis, Elsevier, vol. 96(PA).
    3. Zhang, Chen & Fang, Ying & Niu, Linlin, 2022. "Changing anchor of the renminbi: A Bayesian learning approach to the decade-long transition," Economic Modelling, Elsevier, vol. 116(C).
    4. Zhiyuan Liu & Peijie Wang, 2024. "Constraints on currency market movements – Implications for the RMB exchange rate regime," The World Economy, Wiley Blackwell, vol. 47(3), pages 858-879, March.
    5. He, Qing & Liang, Bailin & Liu, Junyi, 2024. "RMB internationalization and exchange rate exposure of Chinese listed firms," Journal of International Money and Finance, Elsevier, vol. 145(C).
    6. Li, Jie & Smallwood, Aaron D., 2025. "The evolution of the relationship between onshore and offshore RMB markets under asymmetric volatility spillovers," Global Finance Journal, Elsevier, vol. 65(C).
    7. Zhang, Qisi & Frömmel, Michael & Baidoo, Edwin, 2024. "Donald Trump's tweets, political value judgment, and the Renminbi exchange rate," International Review of Financial Analysis, Elsevier, vol. 93(C).
    8. Keddad, Benjamin & Sato, Kiyotaka, 2022. "The influence of the renminbi and its macroeconomic determinants: A new Chinese monetary order in Asia?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 79(C).
    9. Michael Melvin & Frank Westermann, 2022. "Chinese Exchange Rate Policy: Lessons for Global Investors," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(1), pages 145-168, February.
    10. Heimonen, Kari & Rönkkö, Risto, 2024. "The RMB's global role as an anchor currency: No evidence," BOFIT Discussion Papers 5/2024, Bank of Finland Institute for Emerging Economies (BOFIT).
    11. Jia, Fei & Shen, Yao & Ren, Junfan & Xu, Xiangyun, 2021. "The impact of offshore exchange rate expectations on onshore exchange rates: The case of Chinese RMB," The North American Journal of Economics and Finance, Elsevier, vol. 56(C).
    12. Yue Chen & Juan Lin & Ximing Wu, 2022. "Revisiting the return‐volatility relationship of exchange rates: New evidence from offshore RMB," Pacific Economic Review, Wiley Blackwell, vol. 27(3), pages 277-294, August.
    13. Ping Wang & Peijie Wang, 2022. "Assessment on estimations of currency basket weights—With coefficient correction for common factor dominance," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 1401-1418, January.
    14. Cho-Hoi Hui & Chi-Fai Lo, 2018. "A simple explanation of biased movements of renminbi exchange rate," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 5(04), pages 1-12, December.
    15. 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.
    16. Tom Pak Wing Fong & Alfred Yun Tong Wong, 2020. "Safehavenness of the Chinese renminbi," International Finance, Wiley Blackwell, vol. 23(2), pages 215-233, August.
    17. Zhitao Lin & Jinzhao Chen & Xingwang Qian, 2022. "Capital controls and the volatility of the renminbi covered interest deviation," Review of International Economics, Wiley Blackwell, vol. 30(1), pages 205-236, February.
    18. He, Qing & Wang, Wenqing & Yu, Jishuang, 2023. "Exchange rate co-movements and corporate foreign exchange exposures: A study on RMB," International Review of Financial Analysis, Elsevier, vol. 90(C).

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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