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References

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1

Between December 2008 and July 2010, the PBoC established currency swap lines to the tune of RMB 800 billion with eight central banks, including Argentina, Belarus, Hong Kong, Iceland, Indonesia, Malaysia, Singapore, and South Korea. In November 2011, Premier Wen proposed expanding the use of swap lines with countries that belong to the Shanghai Cooperation Organization. Member countries include Russia, Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan and China. India, Iran, Mongolia and Pakistan take part as observer. In January 2012, China signed the first currency swap agreement with an Arab nation, worth 35 billion RMB with the United Arab Emirates.

2

According to PBoC’s Monetary Policy Report for Q4 2011, use of the scheme has become more balanced with the ratio of inflows to outflows from Mainland China declining from 1:5.5 in 2010 to 1:1.7 in 2011.

3

For instance, between 1985 and 1989, the proportion of offshore yen claims on Japanese residents jumped from around 20 to 60 percent (McCauley, 2011)

4

See Morgan Stanley (2011) for more detailed discussion.

5

This specification has the advantage of imposing positive definiteness on the conditional covariance matrix, which is needed for the likelihood function estimation. More restricted version of multivariate GARCH models have been explored in the literature following Bollerslev et. al (1988) with no correlation on conditional covariance matrix or Bollerslev (1990) with constant conditional correlation restriction.

6

While Ding et al. (2011) considered five lags in VAR model with daily data to take into account up to one trading week’s worth of activity, we consider only one day lag in our model to focus on short-term price dynamics.

7

Offshore spot and forward exchange rates began trading in Hong Kong, SAR in August 23, 2010 and September 8, 2010, respectively.

8

In particular, on the back of stronger-than-expected demand for RMB for cross-border trade settlement, the Bank of China in Hong Kong (the official clearing bank for trade settlement) used up its initial quota of RMB 8 billion in the third quarter of 2010, leading to a sharp appreciation of the CNH as liquidity in the offshore market dried up. In response, the Hong Kong Monetary Authority (HKMA) activated its swap arrangement with the PBoC in late October and, since then the exchange rate differential began to narrow. As market liquidity improved in line with the use of RMB in trade settlement, onshore and offshore exchange rates continued to converge.

9

Coefficient estimates for own one-day lag are small and statistically insignificant for both CHY and CNH, consistent with low serial correlations of return series.

10

Standard Chartered Bank (2011) reported that volatility of offshore spot exchange rates is higher than that of onshore spot rate by 40-50 percent (based on daily data)

RMB Internationalization: O+L5022nshore/Offshore Links
Author: Samar Maziad and Mr. Joong S Kang