Development of the Renminbi Market in Hong Kong SAR: Assessing Onshore-Offshore Market Integration

 
Author/Editor: R. Sean Craig ; Changchun Hua ; Philip Ng ; Raymond Yuen
 
Publication Date: December 24, 2013
 



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Summary: Offshore use of the renminbi expanded rapidly in Hong Kong SAR as China sought to develop an international role for its currency while maintaining capital controls. This prompts two questions addressed in this paper: How far advanced is renminbi internationalization? And, what role does Chinese capital account liberalization play? The first is addressed by testing the extent of integration of offshore and onshore markets for the renminbi using a Threshold Autoregression (TAR) model and finds that there are substantial unexploited arbitrage opportunities. A VAR model is used to indentify factors contributing to this limited market integration and finds that capital controls and shifts in global market sentiment explain much of the divergence in onshore and offshore renminbi exchange rates. To address the second question, the paper shows how capital account measures have been used to promote offshore use of the renminbi more actively in the wake of the global financial crisis, but that this was done asymmetrically with controls on inflows eased to a greater extent than on outflows. It concludes that a more balanced liberalization process will sustain progress in renminbi internationalization.
 
Series: Working Paper No. 13/268
Subject(s): Foreign exchange transactions | Capital account liberalization | Capital account | Capital controls | Economic integration | Exchange rates | Capital flows | Foreign direct investment | China, People's Republic of | Hong Kong Special Administrative Region of China

 
English
Publication Date: December 24, 2013
ISBN/ISSN: 9781484332948/1018-5941 Format: Paper
Stock No: WPIEA2013268 Pages: 25
Price:
US$18.00 (Academic Rate:
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