Can onshore spot market progress influence offshore N.D.F. market development for the C.N.Y?

Abstract

This study utilises a time-varying wavelet analysis to examine the relationship between the onshore spot market and the offshore non-deliverable forward (N.D.F.) market of the Chinese Yuan (C.N.Y.). Given the presence of structural changes in the two markets, we did not find any stable causality during the sample period. However, in some sub-samples, we found that there is a strong nonlinear causal relationship running from the onshore spot market to the offshore N.D.F. market. Ties between the two markets are closer after the widening of the onshore trading band, first in April 2012, second in March 2014 and again in August 2015. The onshore spot market is heavily influenced by interventions by the People's Bank of China (P.B.C.). These findings imply that offshore N.D.F. market development is not divorced from onshore development, as developments in the onshore spot market influence the offshore N.D.F. market. The results show that the exchange rate markets for the C.N.Y. are not efficient. Thus, to successfully internationalise the C.N.Y., financial expansion of the onshore spot market should keep pace with the growing offshore N.D.F. market to minimise destabilisation of the C.N.Y.

Does offshore NDF market influence onshore forex market? Evidence from India

“…These markets then started growing in Latin American countries during the 1990s and subsequently expanded rapidly in Asia and Eastern Europe. Analysts and policymakers began recognizing the presence of NDF markets and their interrelationship with onshore market across several countries and regions, including Asian currencies (Colavecchio & Funke, 2008; Gu & McNelis, 2013; Ma & McCauley, 2013; Ma et al, 2004), the Korean Won (Park, 2001), the Chinese Renminbi (Colavecchio & Funke, 2008; Ding et al, 2014; Fung et al, 2004; McCauley & Shu, 2019; Su et al, 2019), the INR (Behera, 2011; Goyal et al, 2013; Guru, 2009; Kumar & Jain, 2018; Misra & Behera, 2006), and the Indonesian Rupiah (Cadarajat & Lubis, 2012). Various empirical studies found an impact of offshore markets on the onshore forward market (Cadarajat & Lubis, 2012; Park, 2001; Wang et al, 2007), onshore spot market (Behera, 2011, Goyal et al, 2013; Reserve Bank of India, 2013), and onshore futures market (Behera, 2011).…”