China, Hong Kong, and Taiwan: A quantitative assessment of real and financial integration

Abstract

The status of real and financial integration of China, Hong Kong, and Taiwan is investigated using monthly data on one-month interbank rates, exchange rates, and prices. Specifically, the degree of integration is assessed based on the empirical validity of real interest parity, uncovered interest parity, and relative purchasing power parity. There is evidence these parity conditions tend to hold over longer periods, although they do not hold instantaneously. Overall, the magnitude of deviations from the parity conditions is shrinking over time. In particular, China and Hong Kong appear to have experienced significant increases in integration during the sample period. It is also found that exchange rate variability plays a major role in determining the variability of deviations from these parity conditions. Key words: uncovered interest parity, real interest parity, purchasing power parity, exchange rates, capital mobility, market integration JEL classification: F31, F41 On financial/monetary issues, see Cheung, He and Ng (1994), Glick and Hutchison (1990), Chinn and Frankel (1994), De Brouwer (1999), Tsang (2002 and in the post-Crisis era, Kumhof (2001). In terms of real exchange rates, see most recently Cheung and Lai (1998),Chinn (2000), Fujii (2002), andFukuda andKano (1997 The integration process between these three economies that comprise what is often termed "Greater China" is proceeding more along de facto than de jure lines. While the development among the Greater China economies has often been remarked upon, we believe that up until this point the analyses examining the strengthening of ties between these economies have been of an essentially anecdotal nature. 4 In this paper, we examine quantitative aspects of integration in the context of macroeconomic concerns and characterize the current and future scope for integration and macroeconomic management between the Greater China economies.It is known that market integration has direct implications for the effectiveness of domestic stabilization policy. Thus, a comprehensive stocktaking will allow policy makers to assess the spillover effects of macroeconomic policies among these economies, even as their combined importance in the world economy increases. To put these concerns into concrete form, One early exception is Wei and Frankel (1994), who provide an assessment of whether a Greater China trade bloc exists.4 not only do these aspects of financial market integration matter, but so too do measures of real market integration. 5The focus of this study is to examine real interest parity, uncovered interest parity, and purchasing power parity. These three parity conditions define the key links between markets and are cornerstones of models in international finance. They are closely examined and routinely used as a gauge of the degree of integration in capital, financial, and goods markets. The real interest parity condition hinges on capital mobility and whether capital flows equalize real interest rates across economies. It can be shown that t...

Economic Integration between China and the ASEAN‑5

“…The fact that the testing of these hypotheses uses data that is available in high frequency adds to their empirical appeal. Within the parity condition framework, this paper follows the specific methodology devised by Cheung, et al (2002) in the context of economic integration within the Greater China region (China, Hong Kong SAR and Taiwan, China). The following is a brief overview of that approach.…”

Capital Flight: China’s Experience

“…In general, see, for example, Aliber (1973), Dooley and Isard (1980) and Frankel and Engel (1984), and in the content of China, see, for example, Cheung et al (2003) and Ma and McCauley (2008). 8 of F t and CID t .…”

[No Title Available]

“…The first method draws insights from levine (1991) and frankel and Macarthur (1988) but it is based on Cheung et al (2003). The latter has separated the variance of rids between deviations from relative PPP and UIP using the relationships given by RIPH as in the following equation …”

“…as explained by engel (1996, p. 138) engel (1996) has further criticised the works of Canova (1991), bekaert (1994), Gokey (1994) and Huang (1990) Cheung et al (2003), the only work performing variance decomposition along the lines set on (2) and (3) is Tanner (1998). However, Tanner's (1998) paper suffers from the same shortcomings raised by engel (1996) to the aforementioned previous works.…”