Interest Rate Linkages between Offshore and Onshore Renminbi Markets

Abstract

We examine the interest rate volatility spillover between the offshore and onshore Renminbi (RMB) markets. The Hong Kong inter‐bank RMB offer rate (CNY HIBOR) and the Shanghai inter‐bank offer rate (SHIBOR) are used, respectively, as the interest rates for the offshore and onshore RMB markets. The results of our research show that there was significant volatility spillover between the offshore and onshore RMB prior to 21 June 2013 and that direction of the spillover from the SHIBOR to the CNY HIBOR is stronger than that from CNY HIBOR to SHIBOR. However, the spillover declined in strength between 21 June 2013 and 20 April 2016. We also find that the interest rate correlations are low and unstable. Our research reveals that the offshore RMB interest rate has been an independent system that is not determined by the onshore market, and that the determination of the offshore RMB interest rate is very complicated. The Hong Kong market is increasingly playing a more important role in the determination of the RMB. This study contributes to our understanding of the interest rate determination in China and has important implications for policy makers in terms of interest rate policies in the offshore and onshore RMB markets.