Abstract: Hong Kong has the world’s largest pool of RMB funds. Its balance of RMB offshore deposits holds the first place among the largest international financial centers. Taking the data of monthly RMB offshore deposits of Hong Kong’s banking industry from 2004 to 2012 as the sample, this paper establishes a state space model to inspect the impact of the growth of RMB offshore deposits in Hong Kong on the domestic currency circulation. The results show that the operation of Hong Kong’s RMB offshore deposit market has strengthened the effectiveness of the domestic and foreign economic policies, thus indirectly affecting the domestic currency circulation. Under such influence, the changes of the variables related with the monetary circulation also demonstrate time consistency and the characteristics of volatility callback. Therefore, we should both enhance the coordination and cooperation between Hong Kong and the domestic monetary authorities and strengthen the management and control of the extralegal circulation of RMB offshore deposit in Hong Kong.

Key words: RMB offshore deposits; currency circulation; state-space model