Chapter 15 Deviations from Covered Interest Parity: The Case of China

Yin-Wong Cheung and Xingwang Qian

A chapter in The Evolving Role of Asia in Global Finance, 2011, pp 369-386 from Emerald Group Publishing Limited

Abstract: We study the empirical determinants of the Chinese renminbi (RMB) covered interest differential. The canonical macroeconomic variables including capital flight and the factors that affect country risk, and a few China-specific regulatory and institutional factors are considered. It is found that the effects of these canonical macroeconomic variables on the RMB covered interest differential are largely consistent with those reported in the literature. Further, the covered interest differential was affected by China's general capital control policy and its exchange rate reform program, but not its political risk index. The effects of these explanatory variables on the covered interest differential appear to work mainly via the forward premium rather than the interest rate differential component. The results are largely the same across the onshore and offshore RMB forward rates that cover different sample periods.

Keywords: Covered interest differential; forward premium; expected depreciation; macrodeterminants (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:eme:fegzzz:s1574-8715(2011)0000009020

DOI: 10.1108/S1574-8715(2011)0000009020

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