Studies On China's Currency Swap Lines, And The Linkages Of The RMB Rate And Equity Prices In Onshore And Offshore Markets

During the 2008 global financial crisis, the international monetary system experienced an acute US dollar shortage that severely curtailed global trade and pressured international banking business. The dollar squeeze critically illustrated the danger of operating a US-centric global financial system. Against this backdrop, China has actively implemented measures of promoting the cross-border use of the Chinese currency, the renminbi (RMB), to reduce its reliance on the US dollar. One of the most critical measures of currency internationalization is to establish the RMB swap network. The relative low frequency/volume of uses does not undermine the interest for setting up a bilateral RMB local currency swap line with China. The enthusiasm is underpinned not only by bilateral trade opportunities, but also the prospect of being part of China's grand program to globalize its currency.Although the pace of RMB cross-border use and internationalization are fast, capital controls are still significant. The price disparities of onshore/offshore RMB exchange rates and stocks dual listed in the A- and H-share markets have continuely existed because of the institutional separation. So it is worthful to investigate the Chinese foreign exchange and stock markets' onshore/offshore links through both macro and micro perspectives. In this thesis, with the help of proper econometric methods and models, we study the determinants of China's bilateral local currency swap lines; investigate the onshore and offshore links between Chinese foreign exchange and stock markets and study the onshore/offshore RMB exchange rates exposures on the dual listed companies in both A and H share markets. Works and results are summarized in the following parts:(1) It is found that economic factors, political considerations, and institutional characteristics including trade intensity, economic size, strategic partnership, free trade agreement, corruption, and stability affect the decision of signing a swap line agreement. Once a swap line agreement decision is made, the size of the swap line is then mainly affected by trade intensity, economic size and the presence of a free trade agreement. The results are quite robust with respect to the choices of the Heckman two-stage framework or the proportional hazard model with both annual and quarterly frequency data. The gravity effect captured by distances between China and its counterparts, if present, is mainly observed during the early part of the sample period under consideration.(2) Through inducing proper GARCH model and causal test, we find that the two differentials become wide or narrow synchronously and appreciation of onshore (offshore) currency always accompanies by higher returns of onshore (offshore) stock performance in the size dimension, and volatilities of the two differentials have significant positive relationships before China launched the Shanghai-Hong Kong Stock Connect while the relations become weaker after that. We further find the two disparities are commonly but oppositely determined by differences of onshore/offshore aggregate market conditions and global infection factors and liberalization policies on financial markets reforms reduce both volatilities as expected, with more effects on share disparities before the stock connect.(3) We continue study the relationship between CNH-CNY differentials and A-H price disparities through daily firm level data. By constructuring dynamic panel model and controlling all the independent variables in previous literature, we use system GMM estimator to find that in the firm level, CNH-CNY differentials are also significantly related to A-H price disparities. At the same time, we find both onshore and offshore RMB exchange rates have significant exchange rates exposure on the dual-listed firms in both A and H share markets. The common part is that stock returns will increase with currency depreciation while the different part is that onshore RMB has less exchange rates exposures than offshore RMB because the more open offshore market offers greater international effects. From industry's sight, both onshore and offshore currencies have most exchange rates exposure on the financial sector.