RMB Revaluation, NDF and Chinese Capital Market

This paper examines Chinese financial market data to assess the likelihood of RMB exchange rate, interest rate, NDF and Chinese A share-price using by VAR model, impulse response and variance decompositions. We find an evidence of bidirectional causality between interest-rate differential and exchange rate. The results further suggest uni-directional causality from spot exchange rate variable to NDF. Specially, the empirical results show that the 3-month non-deliverable forward premia are important series linking these variables. The forward premia has some extent effect on predicting series A share-price changes. Therefore, these finding indicates that the expectation of RMB revaluation lead to international speculative capital movement, even capital control in China, which in turn has effect on Chinese capital markets.