Forecasting renminbi quotes in the revised Chinese FX market - can we get implications for the onshore/offshore spread-behaviour?

Since 2011 China attempts to internationalise its currency by allowing more cross-border trade to be settled in renminbi (RMB). Via the so-called RMB Trade Settlement Scheme trade partners are able to pay and to be paid in RMB offshore. Due to the mostly closed mainland (onshore) market, both markets - dealing with the same currency (RMB) - are separated, whereas CNY refers to the onshore and CNH refers to the offshore market. In this paper, we provide a two-step investigation of the RMB markets. First, we investigate the short-term forecasting performance of spot CNY with GARCH-type and neural network models. Second, we attempt to uncover the benefits of relationships between onshore and offshore RMB. This is achieved by simulating both RMB time series in a multivariate way. Our conclusion is that our proposed models lead to a better understanding of the still young volatility behaviour of the two different RMB series.