Study On The Spillover Effect Of Offshore And Onshore Exchange Rate In The Process Of RMB Internationalization

In October 2016,the RMB was formally included in the SDR currency basket,which is the most important milestone in the process of RMB internationalization,marking a new stage of historical development of RMB internationalization.According to the International Monetary Fund(IMF),by the end of 2018,RMB reserves had reached $202.8 billion in official foreign exchange reserve currency composition,ranking fifth in a separate list of currencies.With the further development of “Belt and Road Initiative” construction,the function of RMB as payment currency,denominated currency,investment currency and reserve currency has been strengthened,and the internationalization of RMB has continued to advance steadily.The “8.11” exchange rate reform in 2015 improved the formation mechanism of the RMB exchange rate and enhanced the volatility of the exchange rate.The launch of a series of policies,such as the “Shanghai-Hong Kong Stock Connect”,the “Shenzhen-Hong Kong Stock Connect”,and the “Bond Connect” enhanced the vitality of the RMB offshore market.It promotes the two-way flow of RMB between offshore and onshore,and strengthens the connection between offshore and onshore RMB market.However,the relationship between RMB offshore market and onshore market has become more complex.In the process of RMB internationalization,how to deal with the impact of changes in the international financial situation,how to avoid foreign exchange risks abroad and how to maintain the basic stability of RMB exchange rate in a reasonable equilibrium level has become a difficult problem in front of the monetary supervision department.In order to further clarify the information transmission relationship between offshore and onshore market exchange rate,take the initiative to deal with foreign exchange risk,maintain the basic stability of exchange rate,and promote the internationalization of RMB.Based on the theory of interest rate parity,this paper selects the RMB onshore spot exchange rate(CNY),the Hong Kong offshore RMB spot exchange rate(CNH)and the non-deliverable RMB forward exchange rate(NDF).This paper makes an empirical study on the reward spillover of RMB offshore and onshore exchange rate by using markov district system conversion vector autoregressive model(MS-VAR)and impulse response function.Using MGARCH-BEKK model,this paper empirically tests the volatility spillover of RMB offshore and onshore exchange rates before and after the “8.11” exchange rate reform,and quantitatively analyzes the information transmission and price discovery of offshore and onshore markets in the process of RMB internationalization.The main conclusions are as follows:First,before the “8.11” exchange rate reform,the RMB onshore spot exchange rate,the Hong Kong offshore spot exchange rate and the non-deliverable forward exchange rate were mainly low fluctuations.After the “8.11” exchange rate reform,the three markets frequently experienced high fluctuations.Before the exchange rate reform,the RMB onshore exchange rate mainly refers to a basket of currency exchange rate changes.After the exchange rate reform,on the basis of reference to the exchange rate changes of a basket of currencies,a market maker was added to quote the closing price of the inter-bank exchange rate on the first day of the examination,and then the "counter-cyclical adjustment factor" was introduced.The "8.11" exchange rate reform enhanced the influence of market supply and demand on the exchange rate formation mechanism,so it also enhanced the volatility of the exchange rate.Due to the introduction of the "counter-cyclical adjustment factor",the herding effect in the foreign exchange market was effectively suppressed,and enhanced the two-way fluctuations in the RMB exchange rate.Second,from the perspective of the reward spillover,the non-deliverable RMB forward exchange rate has little spillover effect on the onshore spot exchange rate and the Hong Kong offshore spot exchange rate.The Hong Kong offshore RMB spot exchange rate has an obvious spillover effect on the RMB onshore spot exchange rate and the non-deliverable forward exchange rate.And the spillover effect of Hong Kong offshore RMB spot exchange rate on the non-deliverable RMB forward exchange rate is greater than that on the onshore spot exchange rate,which is mainly due to the fact that the Hong Kong offshore spot exchange rate and the non-deliverable RMB forward exchange rate are both offshore market exchange rates.The influence of market supply and demand is more obvious.RMB onshore spot exchange rate has little spillover effect on non-deliverable forward exchange rate,but it has obvious spillover effect on Hong Kong offshore spot exchange rate.It can be seen that with the advancement of RMB internationalization and the development of Hong Kong offshore market,the Hong Kong offshore spot exchange rate has a strong function of information transmission and price discovery.Third,from the perspective of the volatility spillover,before the “8.11” exchange rate reform,there were two-way GARCH volatility spillovers between the RMB onshore spot exchange rate and the Hong Kong offshore spot exchange rate,and between the onshore spot exchange rate and the non-deliverable forward exchange rate.the Hong Kong offshore spot exchange rate and the non-deliverable RMB forward exchange rate did not spill over,indicating that the RMB onshore spot exchange rate had a significant market leading position before the exchange rate reform.After the “8.11” exchange rate reform,The RMB onshore spot exchange rate and the Hong Kong offshore spot exchange rate include not only GARCH-type volatility spillover,but also ARCH-type volatility spillover.The links between the three markets are more complex,in particular,strengthened the link between the Hong Kong offshore market and the RMB non-deliverable forward market.From this point of view,the “8.11” exchange rate reform has enhanced the role of the Hong Kong offshore market,giving it the same volatility spillover position as the RMB onshore market.To sum up,the reform of RMB exchange rate marketization and the introduction of “Shanghai-Hong Kong Stock Connect”,“Shenzhen-Hong Kong Stock Connect” and “Bond Link” have improved the two-way flow of RMB in the offshore market and onshore market,and strengthened the connection between the offshore exchange rate and the onshore exchange rate.The promotion of RMB internationalization has enhanced the vitality of the offshore market and enhanced the spillover status of the Hong Kong offshore market.