China's Currency Swap Lines, and the Linkages of the RMB Rate and Equity Prices in Onshore and Offshore Markets


Student thesis: Doctoral Thesis

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  • Zhitao LIN

Related Research Unit(s)


Awarding Institution
Award date5 Sep 2016


This thesis is focused on three topics: China's bilateral currency swap lines and the relationships of Renminbi (RMB) rate's and stock price's onshore and offshore disparities (CNH-CNY differentials and A-H share price disparities) from both the index and firm levels perspectives.
First, we study the mechanism of China's bilateral swap lines using the Heckman two-stage method and the proportional hazard model. We find that economic factors, political considerations, and institutional characteristics including trade intensity, economic size, strategic partnership, free trade agreement, corruption, and stability affect the decision of signing a swap line agreement. Once a swap line agreement decision is made, the size of the swap line is then mainly affected by trade intensity, economic size and the presence of a free trade agreement. The results are quite robust with respect to the choices of the Heckman two-stage framework or the proportional hazard model using both annual and quarterly frequency data. The gravity effect captured by distances between China and its counterparts, if present, is mainly observed during the early part of the sample period under consideration.
Second, backed by the China's onshore/offshore financial reforms and markets integration process, we study the relationships and determinants of the CNH-CNY differentials in the foreign exchange market and the average A-H share return premiums in the equity market. By constructing proper GARCH models and implementing causal test, we find that the two differentials become wide or narrow synchronously and appreciation of onshore (offshore) currency always accompanies by higher returns of onshore (offshore) stock performance in the size dimension, and volatilities of the two differentials have significant positive relationships before China launched the Shanghai-Hong Kong Stock Connect while the relations become weaker after that. We further find the two disparities are commonly but oppositely determined by differences of onshore/offshore aggregate market conditions and global infection factors and liberalization policies on financial markets reforms reduce both volatilities as expected, with more effects on share disparities before the stock-connect. Further, behaviors of the stock-connect affects the A-H premiums significantly and difference of CNH/CNY liquidity conditions has apparent effect on the exchange rates differentials respectively after the stock-connect.
We continue to study the relationship between CNH-CNY differentials and A-H price disparities through daily firm level data. By constructing dynamic panel model and controlling all the independent variables in previous literature, we use system GMM estimator to find that in the firm level, CNH-CNY differentials are also significantly related to A-H price disparities. At the same time, we find both onshore and offshore RMB exchange rates have significant exchange rates exposure on the listed firms in both A and H share markets. The common part is that stock returns will increase with currency depreciation while the different part is that onshore RMB has less exchange rates exposures than offshore RMB because the more open offshore market offers greater international effects. From industry's sight, both onshore and offshore currencies have most exchange rates exposure on the financial sector.