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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.

The process of Asia's rise to a position of eminence in global finance has accelerated in the wake of the international financial crisis, posing new opportunities and challenges to both the Asian economies and the global financial and trade systems. This volume represents a significant new endeavor to explore and understand the dynamics created by this process of transition. Specifically, it addresses the following four contemporary themes of the evolving role of Asia in global finance: (a) real and financial interactions among economies and across markets, both within Asia and beyond; (b) regional monetary cooperation in Asia; (c) the decoupling debate over Asia's evolving economic and financial ties with major industrial economies; and (d) the changing roles of domestic finance and capital flows in the developing Asian economies. It sheds light on various dimensions of Asia's economy and finance, ranging from business cycles, exchange rate movements, regional policy coordination, domestic financial development, capital flows, and financial market behavior. These analyses are pooled in a book that is a must read for market participants, policymakers, and academics alike.

Asia's economic integration into the global system has many dimensions. It is part of the broader globalization process that has taken place over the past two decades and involves dynamics of convergence, integration, and interactions of both real and financial activities. Section 1 examines some of the recent trends in the real and financial interactions between Asia and the rest of the world and among different markets within Asia. It contains four chapters on this theme, addressing the issues of macroeconomic similarities and differences, interactions among Asian stock markets and between them and the US equity market, as well as spillovers across various types of financial markets in the region in response to shocks.

Bertrand Candelon is a professor in International Monetary Economics. He received a PhD from Universite Catholique de Louvain. After a postdoctoral fellowship at the Humboldt Universität zu Berlin, he joined University Maastricht, School of Business and Economics in 2001. He has written extensive works in the area of international finance, in particular on contagion and on the analysis of financial market co-movements. He is one of the founders of the Methods in International Finance Network.

We investigate whether or not the effects of the subprime financial crisis on 12 Asian economies are similar to those of the Asian financial crisis by examining volatility spillovers and time-varying correlation between the US and Asian stock markets. After pretesting volatility causality and constancy of correlation, we estimate an appropriate smooth-transition correlation VAR-GARCH model for each Asian stock market. First, the empirical evidence indicates stark differences in stock market linkages between the two crises. The volatility causality comes from the crises-originating country. Volatility in Asian stock markets Granger-caused volatility in the US market during the Asian crisis, whereas volatility in the US stock market Granger-caused volatility in Asian stock markets during the subprime crisis. Second, decreased correlations during the period of financial turmoil were observed, especially during the Asian financial crisis. Third, the estimated points of transition in the correlation are indicative of market participants’ awareness of the ensuing stock market crashes in July 1997 and in September 2008.