Determinants of the onshore and offshore Chinese government yield curves

• We study the onshore and offshore RMB government bond yield curves.
• The impact of macroeconomic variables is determined in a VAR model.
• Market forces have a higher impact on the offshore market than on the onshore market.
• Exchange rate expectations are the main driving variable for both markets.
• Weak spillover effects between from the onshore to the offshore bond curves are observed.

As part of its effort to internationalize the Renminbi, China's government has promoted the establishment of a regulated offshore Renminbi capital market hub in Hong Kong, where, among other activities, it issues RMB-denominated government bonds in order to establish a benchmark yield curve in the market. In a VAR model where yield curves are represented by Nelson–Siegel latent factors and which includes basic macroeconomic variables, we find that market forces have a higher impact on the offshore market for government bond yields than on the corresponding onshore market. Exchange rate expectations turn out to be the main driving variable for both the onshore and the offshore market, with a significantly stronger impact on the latter. Weak spillover effects from the onshore government bond yield curve to the offshore yield curve are observed, but no spillover effects the other way round are present.