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Offshore Fears and Onshore Risk: Exchange Rate Pressures and Bank Volatility Contagion in the People’s Republic of China

Author

Listed:
  • Lai , Jennifer

    (Guangdong University of Foreign Studies)

  • McNelis, Paul

    (Fordham University)

Abstract

This paper shows that signals from the offshore Hong Kong, China spot market for the currency of the People’s Republic of China (PRC), the renminbi (listed as CNH), directly affect the volatility of share prices of PRC banks and the overall risks to banking stability in the country. This is especially so amid heightened uncertainty about global trade of the PRC. Thus, CNH market volatility is a leading indicator of onshore PRC banking sector volatility. The results suggest that further offshore exchange market movements arising out of news such as increasing trade friction with the United States will generate greater volatility in the PRC’s banking sector. Far from being a shock absorber for the financial system of the PRC, the CNH market appears to be a shock transmitter of risk from offshore economic policy uncertainty to the PRC’s banking system.

Suggested Citation

  • Lai , Jennifer & McNelis, Paul, 2019. "Offshore Fears and Onshore Risk: Exchange Rate Pressures and Bank Volatility Contagion in the People’s Republic of China," ADB Economics Working Paper Series 602, Asian Development Bank.
  • Handle: RePEc:ris:adbewp:0602
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    banking stability of the PRC; CNH market; currency of the PRC; exchange rate pressures; offshore exchange markets;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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