Abstract: Since the formation of RMB exchange rate of Hong Kong offshore market (CNH), the most study of domestic currency against the dollar (CNY) and CNH think that CNY has a leading role. With the continuous widening of RMB circulation channels between Mainland China and Hong Kong, the dynamic change of exchange rate linkage between the two places is a very important issue. In this paper, the dynamic linkage relationship between CNY and CNH is studied by using the time-varying parameters state space model: the results of Granger Causality Test with breakpoint show that CNY has a guiding relationship to CNH in the early stage of the sample, and then the two are guided by each other, recently, CNH has a guiding relationship with CNY; the state space model of time-varying parameters shows that the influence of CNH on CNY gradually increases; the study of the effect of onshore-offshore rate differentials on the exchange rate shows that an increase in offshore interest rate will lead to the depreciation of the offshore exchange rate and the appreciation of the onshore exchange rate. The main contribution of this paper is the research method avoids the disadvantages of the static coefficient regression model.

Key words: CNY, CNH, Granger causality relationship, state space model