Interrelation Analysis of the RMB Spot and Offshore Markets

In this article we analyzed the interrelation between the spot and offshore forward( NDF) markets using RMB-USD on daily basis. This paper focuses on the impact of the reform in the Chinese exchange rate systems, which occurred in July 2007. By means of using cointegration techniques, we find that the RMB spot rate and NDF price have a long stable relationship and Granger causality testing proved that RMB spot exchange rate and NDF prices are influenced deeply each other. Based on VEC model and variance decomposition of RMB spot rate and NDF price, we can get a result that the RMB spot market is the leading market and has a significant impact on NDF offshore market. This means that because of capital control, it is still possible for governments to pursue independent economic policies even in the presence of influence from the offshore market that it has no control over.