Digital Renminbi: Regime Switching of Economic Integration in the Greater Bay Area
Guangdong, Hong Kong and Macao signed an agreement in 2017 to develop the GBA as an economically integrated area. Since then, the three regions have experienced shocks such as the COVID-19 health crisis and the nation’s development of the CBDC. The e-CNY has already been launched in Shenzhen in the GBA. As the SARs have increasing roles in the internationalization of the CNY, we question whether e-CNY had any impact on the goods and capital flows across the regions, affecting their economic integration. We assess the levels of financial, real, and economic integrations based on deviations from uncovered interest rate parity, purchasing power parity and real interest rate parity of a pair of regions, which are computed from monthly interest rate and price data between January, 2016 and December, 2022. The close-to-zero means validate the parity conditions and indicate high degrees of integrations. The three-state MS regression model identifies three regimes: (1) pre-COVID-19, (2) post-COVID-19 and (3) post-e-CNY. The COVID-19 outbreak brought low integration and low stability, but the launch of the e-CNY restored some of the pre-COVID-19 integration and stability. Regimes 1 and 2 are persistent, and transitions from Regime 3 back to Regime 1 are probable.