How do China's categorical economic policy uncertainties affect the long-term correlation between onshore and offshore RMB exchange rates?

• Impacts of categorical economic policy uncertainties on long-term CNY-CNH exchange rates correlations are explored. • DCC-MIDAS-X model is employed. • FPU, MPU, and EXRPU negatively affect the long-term correlation between CNY and CNH, whereas TPU does not exhibit such an impact. • The CNY and CNH asset portfolio provides risk hedging. Economic policy uncertainty is a key determinant of exchange rate stability. This study investigates the impact of China's categorical economic policy uncertainties on the long-term correlation between onshore (CNY) and offshore (CNH) Renminbi (RMB) exchange rates. We find that fiscal policy uncertainty (FPU), monetary policy uncertainty (MPU), and exchange rate and capital account uncertainty (EXRPU) have a significant negative effect on this correlation, while trade policy uncertainty (TPU) has no significant impact. Furthermore, CNY and CNH do not effectively diversify risks and provide only limited hedging benefits.