Premium
Anomaly in China's Dollar–RMB Forward Market
Author(s) -
Wang Yi David
Publication year - 2010
Publication title -
china and world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.815
H-Index - 28
eISSN - 1749-124X
pISSN - 1671-2234
DOI - 10.1111/j.1749-124x.2010.01191.x
Subject(s) - renminbi , liberian dollar , china , economics , interest rate parity , monetary economics , exchange rate , foreign exchange market , interest rate , covered interest arbitrage , international economics , finance , law , political science
Newly‐established data on onshore deliverable US dollar–RMB forwards and the Shanghai Interbank Offered Rate from October 2006 to April 2009 reveal significant violations of covered interest rate parity. This paper explains the cause of this anomaly. Deviations in the forward market are caused by an increase in US dollar‐to‐RMB conversion restrictions. Given that Chinese monetary authorities want to prevent market participants from taking advantage of the predictable appreciation of the RMB, China's State Administration of Foreign Exchange has to tighten up the control on US dollar‐to‐RMB conversions. Under the tightened conversion restrictions, similar deviations will resurface in the forward market whenever hot money inflow increases. One way to avoid covered interest rate parity violations in the forward market is to decrease hot money inflow into China by maintaining a stable and credible exchange rate policy.