Research On The Development Of Offshore RMB Bond Market In Hong Kong

The internationalization of RMB is the core development strategy of monetary and financial sector in our country. The development of RMB internationalization has made certain achievements in establishing the cross-border RMB trade settlement pilot, allowing the foreign direct investment and RMB loans, simulating the construction in the RMB capital account liberalization process, establishing the “Shanghai-Hong Kong Stock Connect”, carrying out QDII, making RMB being included in the SDR successfully. As the RMB internationalization process speeds up, our country has not yet realized fully capital account liberalization, the construction of offshore financial market can offer new investment channels to certain offshore RMB, make the recycling of offshore RMB smoothly, keep and add value to the asset of foreign investors.Based on the background above, this paper, which is based on the basic knowledge of economics, finance and the existing theories and empirical studies, introduce the development and present situation of the RMB offshore bond market in Hong Kong. Then analyze the factors that affecting the yield rate in this market and discuss the relationship of offshore and onshore bond market. Through the empirical analysis results, we can draw useful conclusions and make political recommendations.The first part introduces the development of offshore RMB bond market in Hong Kong since 2007. The process of building this market includes three stages: the formation, the rapidly growth and the overall construction. The whole market can be summarized into six characteristics including the issuing scale, the types of bonds, the issuers, the main investors, the offering period and the rating system. The development of the offshore RMB bond market in Hong Kong has made great progress, but there are still many problems. This paper summarizes the three main aspects: the lack of reasonable pricing standards, the lack of liquidity in the secondary market and the imperfection of rating system.The second part analyzes the major factors that affecting the yield rates in the offshore RMB bond market in HK. According to the current research and characteristics in Hong Kong market, there are many factors that affect the yield rates such as the risk-free interest rate, the expected appreciation of the RMB, the level of credit and loans in mainland, the exchange rates and interest rates of other currencies, the level of supply and demand in the whole financial market, the liquidity of secondary market and the offering periods. Next make empirical validation using measurement method. This paper selects the first difference of 10-year bond yields issued by the central government, the first difference of one-year RMB against the dollar(NDF), the differentials of SHIBOR and HIBOR, the 3-year bond yields issued by enterprises in mainland, the scale of financial institutions RMB deposit as explanatory variables, the FTSE total index(FTSE) and government bond index(CB) as explained variables, using multiple linear regression model for quantitative analysis. According to the model, the risk-free interest rate, the expected appreciation of the RMB, the differentials of SHIBOR and HIBOR, the bond yields issued by enterprises in mainland and the level of credit and loans in mainland are significantly affect the yields.The third part explore the co-movements between offshore and onshore bond market with GARCH—BEKK model. This paper selects onshore RMB bond index(ZB) and FTSE total index(FTSE) to represent bond yield rates and analyzes the volatility spillover effects between the two markets. According to the calculation onshore and offshore RMB bond markets have volatility spillover effect on each other, but the effect is stronger on the direction from onshore bond market to offshore bond market.Finally, the paper summarizes the conclusions of the research and make political recommendations to promote the development of offshore RMB bond market in Hong Kong. The relationship between supply and demand has been improved since the market has been set up. At present the RMB exchange rate volatility will still bring big risk to the whole market. Now the co-volatility spillover effects show the connection between the two market is more closely. The booming of the offshore RMB bond market in Hong Kong promote the liberalization of onshore financial market including the interest rate liberalization reform and make information transformation more quick. There are four main recommendations to promote the healthy and orderly development of the two markets including deepening development of offshore RMB bond market, guiding the recycling of offshore RMB funds, deepening the reform of interest rate liberalization and improving the co-regulation of the two markets.