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

  • Yin-wong Cheung

    (University of California, Santa Cruz)

  • Menzie D. Chinn

    (University of Wisconsin, Madison and NBER)

  • Eiji Fujii

    (University of Tsukuba)

The linkages between the People's Republic of China and the other Chinese economies of Hong Kong and Taiwan are assessed, and compared against the linkages with Japan and the US. We first characterize the time series behavior of 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 People's Republic of China and all other economies, although they do not hold instantaneously. Overall, the magnitude of deviations from the parity conditions is shrinking over time. Amongst all, however, Hong Kong exhibits indications of a more advanced level of integration with the mainland. 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 degree of financial and real integration depend upon the extent of capital controls, foreign direct investment linkages as well as exchange rate volatility.

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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 072005.

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Length: 32 pages
Date of creation: Jul 2005
Date of revision:
Handle: RePEc:hkm:wpaper:072005
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