Empirical Evidence of the Spot and the Forward Exchange Rates in China

Under conditions of risk neutrality and rational expectations in the foreign exchange market, there should be a one-to-one relationship between the forward rate and the corresponding future spot rate. In this article we examine the daily structure of the spot and forward exchange rates in China using cointegration techniques and VEC model. The results show that the renminbi spot rate and the forward exchange rate have a unit root, with I(1), implying long-term stable relationship between the forward and the corresponding future spot rates in China. Moreover, the VEC model proved that the short-term forward rate has more effect on the future spot exchange rate. These results may provide strong and robust evidence in support of the achievement that Chinese foreign exchange has become more market-oriented.