The interactive CNY-CNH relationship: A wavelet analysis

ABSTRACT

The extant literature has explored the linkages between the onshore (CNY) and offshore (CNH) Renminbi (RMB) markets, as well as the potential factors affecting their dynamic inter-relationship. However, these efforts were made on a stand-alone basis in terms of dimensions and perspectives. This paper hence adopts the wavelet methodology to comprehensively examine the CNY-CNH interactions over 2010–2022. We find information spillovers across the two RMB markets to be bi-directional and asymmetric, with the exact pattern depending upon the particular sample period and the focal data frequency. Moreover, major macroeconomic events such as China's exchange rate reform, US-China trade tensions, COVID-19 pandemic, and more recent global uncertainty can exert distinct impacts on the flow pattern of information. We further show that the CNY-CNH exchange rate difference alone serves as a key indicator for the complex relationship between the two markets. As expected, the CNH market is more sensitive to exchange rate difference fluctuations, indicating a powerful market mechanism in the offshore RMB market, or equivalently, a substantial policy impact of the counter-cyclical adjustment by China's central bank in stabilizing the RMB rate. © 2023 Elsevier Ltd