Offshore fears and onshore risk: exchange rate pressures and bank volatility contagion in China

Abstract

Abstract This paper shows that signals from the offshore China spot market for the Chinese renminbi of the Hong Kong SAR (listed as CNH) directly affect the volatility of share prices of Chinese banks and the overall risks of Chinese banking stability. This is especially so amid heightened uncertainty about global trade or the People’s Republic of China. Thus, the CNH market volatility is a leading indicator of onshore Chinese banking sector volatility. Our results suggest that further offshore exchange market movements arising out of news such as increasing trade friction with the United States will generate greater volatility in the Chinese banking sector. Far from being a shock absorber for the Chinese financial system, the CNH market appears to be a shock transmitter of risk from offshore economic policy uncertainty to the Chinese banking system.