RMB Internationalization: O+L5022nshore/Offshore Links
IMF Working Papers, May 1, 2012
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Bibliographic details
- Authors: Samar Maziad, Joong S Kang
- Published: May 1, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475503838.001
Summary
- Among emerging market currencies, the RMB holds the most potential to become widely used internationally, due to China‘s large economic size, diversified trade structure and network, macroeconomic stability, and high growth rates - both current and expected.
- Foreign access to RMB-denominated assets that could act as global stores of value remains limited due to extensive restrictions on capitals flows.
- Rapid expansion of RMB trade settlement and issuance of RMB-denominated bonds by the Chinese government and corporates in Hong Kong, SAR have created feedback channels across onshore (CNY) and offshore (CNH) RMB markets.
- Over time, those spillover channels would be expected to grow as the offshore market further develops.
Methodology
- Employed a bivariate GARCH model to understand the inter-linkages between onshore and offshore markets.
Key Findings
- Developments in the onshore spot market exert an influence on the offshore spot market.
- Offshore forward rates have a predictive impact on onshore forward rates.
- Evidence of volatility spillovers exists between the two markets.
- The offshore market’s further development is expected to strengthen spillover channels over time.
Policy-relevant Implications
- Limited foreign access to RMB-denominated assets due to capital flow restrictions constrains the RMB’s role as a global store of value despite its internationalization potential.
- Growth in RMB trade settlement and offshore bond issuance creates cross-market feedback channels that link CNY and CNH markets, implying increased interconnectedness as offshore markets deepen.