Does the offshore market matter to China’s exchange rate policy?

ABSTRACT

The central parity rate (CPR) is a key instrument for the People’s Bank of China (PBC) to manage the Renminbi (RMB) exchange rate. The current method of CPR formation rests on a gauge of the ‘demand and supply conditions’ in the foreign exchange market. But there are two markets for RMB, the onshore market for CNY and the offshore market for CNH. In this article, we study the role of the offshore market in the CPR formation mechanism and find that changes in CNH have statistically significant predictive power on CPR, especially after the ‘8.11’ reform of 2015. This suggests that PBC does consider the conditions in the offshore market as well as those in the onshore market.

KEYWORDS:

• Exchange rate policy
• RMB
• central parity rate
• offshore market

JEL CLASSIFICATION:

• E58
• F31
• F37
• G15

Acknowledgments

We thank Qu Xi and Zhiwei Xu for their helpful comments. This work was supported by the National Natural Science Foundation of China [71673183].

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ China Monetary Policy Report Q4, 2016, the People’s Bank of China.

² XXXYYY is the exchange rate quotation with XXX being the base currency and YYY the price currency.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71673183].