The Research On The Co-Movement Effect Between Offshore Nd Onshore RMB Bond Markets

With the continuous expansion of RMB foreign direct investments’ and RMB global cross-border trade settlements’scale,China has made great progress in capital account liberalization and RMB internationalization.Along with this trend,the offshore RMB bond market emerged.Since the first offshore bond was issued in Hong Kong in 2007,the offshore RMB bond market has grown rapidly in just over a decade under the dual stimulus of national policy support and international market demand.At the same time,the onshore RMB bond market has also developed by leaps and bounds over the past three decades.By September 2019,the stock of China’s bond market had exceeded 93 trillion yuan,making it the largest bond market in Asia and the second largest in the world.Participation of foreign investors has continued to increase,with more than 1800 foreign investors in the interbank bond market holding nearly 2 trillion yuan.In this context,the offshore and onshore RMB bond markets have become increasingly linked.In April 2017,Premier Li Keqiang proposed that the central government would launch a "Bond Connect" mode between Hong Kong and the mainland.In July 2017,"Bond Connect" and "Northward Connect" were officially put into operation.Over the past two years,foreign investors have been increasingly keen to participate in China’s onshore bond market through"Bond Connect".More and more domestic and foreign scholars and financial regulators pay close attention to the co-movement effect between offshore and onshore RMB bond markets.In September 2019,China’s State Administration of Foreign Exchange announced that restrictions on investment quotas for QFII and RQFII were lifted.At the same time,restrictions on pilot countries and regions for RQFII were also removed.Therefore,under the background of the internationalization of Chinese domestic bond market and the rapid development of offshore RMB bond market,researching on the co-movement effect between the offshore and onshore RMB bond markets and analyzing the contributing factors of the co-movement relationship have very important theoretical significance and practical significance to ensuring the healthy and stable development of the two markets,to preventing international financial risks and to realizing more effective co-movement relationship.At the same time,this will help to further expand the overseas RMB bond markets,promote the RMB "Going Out" strategy,and enhance the RMB’s international status.Firstly,this paper reviews and integrates the related research achievements of domestic and foreign scholars,then summarizes and analyzes the history and current status of offshore RMB bond market,expounds the theoretical basis of the linkage between the offshore and onshore RMB bond markets.Via the three paths of economic fundamentals,arbitrage and currency supply,and investment portfolio,the paper analyzes and studies the transmission mechanism of co-movement effect.On the basis,this paper selects the daily data of Chinese Bond New Composite Index and Hang Seng Markit iBoxx Offshore RMB Bond Index from November 17,2014 to November 17,2019,uses their logarithmic rate of return to establish binary VAR and BEKK-GARCH models and studies the mean and volatility spillover effects between the offshore and onshore RMB bond markets from the three perspectives of overall bond market,treasury bond market and corporate bond market.In addition,the dynamic conditional correlation derived from DCC-GARCH model and the E-GARCH model are used to further explore the impact of RMB domestic and foreign interest rate spreads,RMB exchange rate expectations,the degree of opening-up of the onshore bond market and other exogenous factors on the co-movement effect between the two markets,and corresponding countermeasures and advice are put forward in the end.Through research,the paper finds that the mean spillover effect between the overall bond markets is not significant.That is to say,there is no remarkable mutual guiding relationship between the means(yields)of the offshore market and the onshore market.As for the volatility spillover effect,the onshore market has a unidirectional effect on the offshore market,though the influence is weak.Overalls,RMB offshore and onshore bond markets’ linkage is insufficient,but the linkage between the two markets gradually increases as the opening-up’s degree of China’s onshore bond market becomes higher.However,in the further analysis of the market segments’ co-movement effect,we come to different conclusions.As for the spillover effects between treasury bond markets,the onshore market guides the offshore market in a unidirectional way.As for the corporate bond market,there is a one-way mean(yield)spillover from the onshore market to the offshore market,while the volatility spillover is bidirectional and the onshore market has a more obvious effect on the offshore market.