OME WORKING PAPER SERIES Do External Political Pressures Affect the Renminbi Exchange Rate?

This paper investigates whether external political pressure for faster renminbi (RMB) appreciation affect both the daily returns and the conditional volatility of the RMB central parity rate. We construct several political pressure indicators pertaining to the RMB exchange rate, with a special emphasis on the US pressure, to test the hypothesis. After controlling for Chinese macroeconomic surprise news, we find that US and non-US political pressure does not have a significant influence on RMB's daily returns. However, evidence suggests that political pressures, and especially those from the US, have statistically significant impacts on the conditional volatility of the RMB. Furthermore, we conduct the same exercise on the 12-month RMB nondeliverable forward rate (NDF). We find that the NDF market is highly responsive to macroeconomic surprise news and there is some evidence that Sino-US bilateral meetings affect the conditional volatility of the RMB NDF.