The Renminbi Central Parity: An Empirical Investigation

33 Pages Posted: 26 Jul 2016

See all articles by Yin-Wong Cheung

Yin-Wong Cheung

City University of Hong Kong - Department of Economics & Finance; University of California, Santa Cruz - Department of Economics; University of California at Santa Cruz - Department of Economics

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department

Andrew Tsang

Hong Kong Monetary Authority

Date Written: June 29, 2016

Abstract

On August 11 2015, China revamped its procedure of setting the official central parity of the renminbi (RMB) against the US dollar. Our empirical investigation shows that the intertemporal dynamics of China’s central parity are not the same before and after this policy change. They are more variable and have a few new determining factors. Both the deviation of the RMB offshore rate from the central parity and the US dollar index are the two significant determinants of the central parity both before and after the policy change. The VIX index has explanatory power before August 2015, but not after. After August 2015, the onshore RMB rate and the difference between the one-month offshore and onshore RMB forward points show a significant impact on the central parity. While the US dollar index effect remains, we find no evidence of a role for the RMB exchange rate against the currency basket revealed by China in December 2015 in the fixing process.

Keywords: China, RMB, exchange rate policy, central parity rate, on-shore and off-shore rates

JEL Classification: F310, F330, G150, G170, G180

Suggested Citation

Cheung, Yin-Wong and Hui, Cho-Hoi and Tsang, Andrew, The Renminbi Central Parity: An Empirical Investigation (June 29, 2016). CESifo Working Paper Series No. 6963. Available at SSRN: https://ssrn.com/abstract=2814464

Yin-Wong Cheung (Contact Author)

City University of Hong Kong - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

University of California, Santa Cruz - Department of Economics ( email )

435 Engineering 2
Santa Cruz, CA 95064
United States
831-459-4247 (Phone)
831-459-5077 (Fax)

University of California at Santa Cruz - Department of Economics ( email )

1156 High Street
Santa Cruz, CA 95064
United States

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department ( email )

Hong Kong
China

Andrew Tsang

Hong Kong Monetary Authority ( email )

55/F, Two International Finance Centre
Hong Kong
Hong Kong

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