Time Series Analysis for the Interest Rates Relationship between Mainland China and Hong Kong Money Markets

This paper aims at investigating the regional financial integration of Mainland China and Hong Kong after the Asian Financial Crisis. We empirically find that, in the long-run, the money markets of Mainland China and Hong Kong have to be mutually linked in order to ensure a long-run equilibrium relationship in the Chinese economic society. In the short-run, Mainland China´s interest rate has a significant impact on the interest rate of Hong Kong, but not conversely. The Mainland China money market is more rigid due to the existence of market barriers and the China´s economic boom in 1990s. Since Hong Kong is typical island-style economies with high degree of market liberalization and its business people have invested huge amount in Mainland China market in recent years, they tend to be more sensitive to the innovations and the volatilities from Mainland China market