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
There are 2 versions of this paper
The Chinese Economies in Global Context: The Integration Process and its Determinants
The Chinese Economies in Global Context: The Integration Process and its Determinants
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: Suggested Citation
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