The Chinese Economies in Global Context: The Integration Process and its Determinants

UC Santa Cruz International Economics Working Paper No. 03-16; UC Santa Cruz Economics Working Paper No. 552

Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 07/2005

Journal of Japanese and International Economies, Vol. 20, No. 1, 2006

32 Pages Posted: 12 Nov 2003 Last revised: 5 Aug 2022

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2005

Abstract

This working paper was written by Yin-wong Cheung (University of California, Santa Cruz), Menzie D. Chinn (University of Wisconsin, Madison and NBER) and Eiji Fujii (University of Tsukuba).

The linkages between the People's Republic of China and the other Chinese economies of Hong Kong and Taiwan are assessed, and compared against those with Japan and the US. We first characterize the time series behavior of three criteria of integration, namely real interest parity, uncovered interest parity, and relative purchasing power parity. There is evidence that these parity conditions tend to hold over longer periods between the People's Republic of China and all other economies, although they do not hold instantaneously. Overall, the magnitude of deviations from the parity conditions is shrinking over time. Amongst all, however, Hong Kong exhibits indications of a more advanced level of integration with the mainland. We also find that evidence is surprisingly positive for integration with the US. We then turn to examining the determinants of the degree of integration. Regression results suggest that the degrees of financial and integration depend upon the extent of capital controls, foreign direct investment linkages as well as exchange rate volatility.

Keywords: uncovered interest parity, real interest parity, purchasing power parity, exchange rates, capital mobility, market integration

JEL Classification: F31, F41

Suggested Citation

Institute for Monetary and Financial Research, Hong Kong, The Chinese Economies in Global Context: The Integration Process and its Determinants (April 1, 2005). UC Santa Cruz International Economics Working Paper No. 03-16; UC Santa Cruz Economics Working Paper No. 552, Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 07/2005, Journal of Japanese and International Economies, Vol. 20, No. 1, 2006, Available at SSRN: https://ssrn.com/abstract=462168 or http://dx.doi.org/10.2139/ssrn.462168

Hong Kong Institute for Monetary and Financial Research (Contact Author)

(HKIMR) ( email )

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