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Renminbi Internationalization: Prospects and Implications for Economic Integration in East Asia
Abstract
This paper argues that renminbi (RMB) internationalization and China's strategic interests in ASEAN will combine to deepen economic integration and pave the way for creating a de facto RMB bloc consisting of the 10 ASEAN countries, China, Hong Kong, and Taiwan—a grouping we call ASEAN+New3. Such a currency bloc is likely to weaken the initiatives of the existing ASEAN+3 (China, Japan, and Korea) for regional monetary-financial cooperation because neither Japan nor can Korea join the new currency bloc for economic and political reasons. This paper also argues that RMB internationalization would delay the resolution of the trade imbalance between East Asia and the United States because China would be pressured by the other members of ASEAN+New3 to maintain stability of the RMB vis-à-vis the U.S. dollar. © 2011 The Earth Institute at Columbia University and the Massachusetts Institute of Technology.
... Historically, the currencies of ASEAN economies were informally pegged to the U.S. dollar (McKinnon and Schnabl 2004). Though the AFC pressurized these economies into seeking other more flexible exchange rate regimes, evidence shows that the U.S. dollar still remains the de facto anchor currency in this region (Park and Song 2011). McKinnon and Schnabl (2004) propose to give the Japanese yen more importance in the East Asian currency basket, whereas Park (2007) argues that Japan lacks strong incentives for monetary integration, and Caporale et al. (2018) suggest that the Chinese renminbi (RMB) should be considered the dominant currency to account for the increasing trade and economic linkages among Chinese and ASEAN economies. ...
... Notably, two recent trends in the East Asian economy have drawn growing attention when discussing financial market integration: the rise of the PRC's economy and internationalization of the RMB (Park and Song 2011;Caporale et al. 2018). Riding on a wave of phenomenal economic growth, the PRC has been a hotspot for international trade and investment, and has been taking an increasingly active role in global economic development (Zhang 2017;Ji and Zhang 2019;Zhang et al. 2019), especially highlighted by several recent movements such as the establishment of the Asian Infrastructure Investment Bank in 2016 and the proposing of the Belt and Road initiative. ...
... Riding on a wave of phenomenal economic growth, the PRC has been a hotspot for international trade and investment, and has been taking an increasingly active role in global economic development (Zhang 2017;Ji and Zhang 2019;Zhang et al. 2019), especially highlighted by several recent movements such as the establishment of the Asian Infrastructure Investment Bank in 2016 and the proposing of the Belt and Road initiative. The RMB, once pegged to the U.S. dollar (1994)(1995)(1996)(1997)(1998)(1999)(2000)(2001)(2002)(2003)(2004)(2005) but then switched to a market-based managed floating regime, has been intensively studied, especially regarding how a rising RMB may affect orders in both the international monetary system (Eichengreen and Lombardi 2017) and the East Asian financial system (Park and Song 2011). ...
Using a systemic approach, this study investigates the time-varying linkages among currency markets of Japan, the People's Republic of China, the Republic of Korea, and the five core ASEAN economies to understand financial integration in Asia. We first construct a vector autoregressive model and use the Diebold and Yilmaz ( 2014 ) approach to quantitatively identify the connectedness within the system, accompanied by a rolling-window approach to allow for time-varying dynamics and pairwise Granger causality tests to check the robustness of our main results. We find that though systemic interconnectedness varies over time, the Singapore dollar is constantly a top net contributor, explaining most of the variation in East Asian currency markets.
... The increase in intra-industry trade with, and geographical proximity to, the PRC suggest that the Republic of Korea may benefit from forming a currency union with the PRC, but as shown by Park and Song (2011), as far as responsiveness to various shocks is concerned, they are asymmetric. Neither the demand nor the supply shocks of the two countries are highly correlated. ...
... Not only for economic but also for strategic reasons, the PRC's policymakers have traditionally placed greater emphasis on integration with its neighboring economies, such as ASEAN member states, than with either Japan or the Republic of Korea. The PRC's asynchronous business cycle means it is not likely to reap large benefits from participating in East Asia's regional integration (Park and Song 2011). ...
... It would not be as unrealistic as it may sound to expect that by reinforcing free trade in the region, internationalization of the yuan would unleash strong market forces that would establish its position as a credible regional currency. Park and Song (2011) have argued that the same market forces would pave the way for the formation of a currency area among the thirteen economies in East Asia. ...
The purpose of this paper is to reexamine the exchange rate policy of the Republic of Korea, and its role in promoting financial and monetary cooperation in East Asia in the wake of the 2008 global financial crisis. The Republic of Korea would not actively participate in any discussion of establishing a regional monetary and exchange rate arrangement as it is expected to maintain a weakly managed floating regime. The People’s Republic of China (PRC) has been fostering the yuan as an international currency, which will lay the groundwork for forming a yuan area among the PRC; the Association of Southeast Asian Nations (ASEAN); Hong Kong, the PRC; and Taipei,China. Japan has shown less interest in assuming a greater role in East Asia’s economic integration due to deflation, a strong yen, slow growth, and political instability. Japan would not eschew free floating. These recent developments demand a new modality of monetary cooperation among the Republic of Korea, Japan, and the PRC. Otherwise, ASEAN 3 will lose its rationale for steering regional economic integration in East Asia.
... Some scholars also explore the factors affecting currency internationalization from the perspective of capital flows. Park (2010) pointed out that the prerequisite for the RMB to become an international currency is that the RMB must be freely convertible in global economic exchanges, that is, the Chinese financial market must be fully opened, and the fixed exchange rate system in the foreign exchange market should be abolished and a floating exchange rate system should be adopted. Su Yuhai et al. (2018) found that exchange rate stability can not only alleviate the impact of short-term capital flows, but also help promote the internationalization of the RMB. ...
Since the launch of the pilot program for RMB settlement in cross-border trade in 2009, the process of RMB internationalization has advanced steadily, achieving significant milestones in cross-border trade and investment settlement, the development of offshore RMB markets, and currency swap agreements. Between 2013 and 2023, the exchange rate co-movement between the RMB and the currencies of Belt and Road Initiative (BRI) countries gradually increased, and the RMB’s position in the global currency market has continued to rise. To examine the degree of linkage between the RMB and the currencies of BRI countries, as well as the evolution of its monetary influence, this paper first selected 91 representative currencies from BRI countries, estimates the exchange rate linkage between the RMB and other currencies, and applies the PMFG algorithm to construct an exchange rate co-movement network for analysis. Furthermore, the paper explores changes in the RMB’s influence during the progression of the BRI and compares its influence with that of the U.S. dollar and the euro in the region.
... Some analysts foresee that almost US$2 trillion worth of cross-border trade can be settled in RMB. A number of recent academic papers argue that the internationalization of China's currency could lead to the creation of a de facto RMB currency bloc in East and Southeast Asia (Park andSong, 2011 andPark, 2010). This is largely due to China's emergence as the largest exports and the second largest imports market for developing Asia; over 40 percent of China's imports originate from its neighbouring countries and over 20 percent exports are directed to them. ...
We investigate the possibility of the Chinese currency, Renminbi (RMB), becoming a dominant international currency. Using a qualitative analysis of the volume of trade and financial transactions, especially cross-border exchanges conducted in RMB from 1980 to 2011 as well as Beijing's recent move to globalise its currency we found that RMB fares well as a candidate to become a dominant international currency. While China's 'sub-optimal' approach in this regard has had marked success in the neighborhood but the RMB's global success as a reserve currency will depend on how Beijing reforms its financial system. Nevertheless, given the rapid changes in the global economy, market forces might prompt RMB's arrival much earlier than the schedule. Further, the paper indicates that the world is perhaps heading towards an era of multiple currency reserve system whereby the RMB could play greater role in the global economy along with the USD, the euro and the Japanese yen.
... Nevertheless, there are still limited numbers of literature made on ASEAN region, and even APT stock markets. Generally, the regional financial integration within Asia is often compared with Asia's integration with the global market (Eichengreen and Park 2005a, b;Poonpatpibul et al. 2006;Park 2011;Park and Lee 2011;Kim and Lee 2012). Almost all studies suggest that the latter form of integration is stronger. ...
This paper examines the role played by local and international factors in the international integration process to stock markets worldwide. Using a sample of ASEAN + 3 (Association of South East Asian Nations + China, Korea and Japan) during the period between 2000 and 2014, we identify the main factors that might influence regional integration of stock markets. We propose an advantageous econometric approach based on a conditional version of the Dynamic International Capital Asset Pricing Model (ICAPM) to explore major sources of time-varying risks. We specifically apply the multivariate BEKK-GARCH process of Cappiello et al. (Journal of Financial Econometrics 25:537–572, 2006) to simultaneously estimate the ICAPM for each country. The study puts in evidence that regional trade openness, regional and world industrial production, dividend yields and commodity prices are among the key determinants of regional integration in the ASEAN + 3 context whatever is the measure of exchange rate risk.
... There are many remaining questions unanswered in this paper that are associated with a greater role for the RMB in international and regional markets. How quickly will the RMB become an important regional currency to eventually challenge the Japanese yen in the diverse Asia-Pacific region (Di Meglio, 2011;Lee, 2013), and if so what would this mean for regional economies and financial markets, such as their degree of integration (de Menil, 2011;Kawai and Pontines, 2016), or the extent of financial and monetary cooperation (Park, 2010;Park and Song, 2011; Qian, 2016)? ...
We investigate the process of currency internationalisation of the Chinese Renminbi (RMB). Aggregated cross-border data provided by the Society for Worldwide Interbank Financial Telecommunications (SWIFT) allows better measurement of the role played by a currency in trade and settlement. RMB transactions are significant and increasing but remain concentrated in key financial centres. Analysis using an asset pricing framework shows that the footprint of Chinese corporations in international markets has at times been significant, with the size of these transactions prompting many to reassess the likely pace of RMB internationalisation and its usage as an alternate vehicle currency.
... For instance, Subramanian et al. (2012) find that co-movements between many East Asian currencies and the RMB are stronger than they are with the USD and argue that a stable exchange rate with the RMB might promote trade integration and maintain export competitiveness within the region. Several papers stress the growing role of the RMB as a potential regional anchor, although the Great and European debt crises have seriously dampened the case for regional monetary cooperation (see, e.g., Chinn , 2015;Ryan , 2015;Park and Song , 2011;Park , 2010). ...
... The US dollar is not the appropriate reference currency. Indeed, if there is an abundant literature revealing the predominant role of the US dollar (Williamson, 2005) and the absence of a Yen Bloc (Shirono, 2009), it seems that, since the 1997-8 crisis, East Asian countries would like to be less peg to the US dollar (with some exceptions, as in China and Hong Kong), and this fact should be upgraded with the subprime crisis Park and Song, 2011). ...
... They first remove the dollar component from the RMB exchange rate (as shown in equations (2) and (3), and over a sample of 9 East Asian countries, they find significant positive coefficients for the period after July 2005 until mid-2009. Park and Song (2011) prefer to neutralize the dollar effect by regressing the exchange rate of various Asian currencies to the dollar over the RMB/dollar exchange rate, and show a high degree of correlation. Pontines and Siregar (2010) find that the RMB has triggers a "fear of appreciating" for Indonesia, Korea, Philippines and Thailand. ...
A country's rise to economic dominance tends to be accompanied by its currency becoming a reference point, with other currencies tracking it implicitly or explicitly. For a sample comprising emerging market economies, we show that in the last two years, the renminbi (RMB) has increasingly become a reference currency which we define as one which exhibits a high degree of co-movement (CMC) with other currencies. In East Asia, there is already a RMB bloc, because the RMB has become the dominant reference currency, eclipsing the dollar, which is a historic development. In this region, 7 currencies out of 10 co-move more closely with the RMB than with the dollar, with the average value of the CMC relative to the RMB being 40 percent greater than that for the dollar. We find that co-movements with a reference currency, especially for the RMB, are associated with trade integration. We draw some lessons for the prospects for the RMB bloc to move beyond Asia based on a comparison of the RMB's situation today and that of the Japanese yen in the early 1990s. If trade were the sole driver, a more global RMB bloc could emerge by the mid-2030s but complementary reforms of the financial and external sector could considerably expedite the process.
... Historiquement, la coopération régionale s'est avérée diffi cile en l'absence de pays dominant et les projets de coopération monétaire régionale en Asie (au-delà de l'accord multilatéral de swaps) s'est heurtée à l'absence de leader incontesté. SelonPark et Song (2011), l'émergence du yuan pourrait affaiblir les initiatives régionales dans le cadre du groupe ASEAN + 3, mais donner naissance à un bloc monétaire de facto autour de la monnaie chinoise. Il est possible néanmoins que la Chine retarde l'adoption du fl ottement précisément pour favoriser l'adoption de sa monnaie au niveau régional (qui resterait stable par rapport au dollar). ...
... 50 The literature is exploding as rapidly as the use of the RMB. It includes Chen, Wang, and Yang (2000); Li and Liu (2007); Dobson and Masson (2009);Ito (2010); Park and Song (2010); Lee (2010); Wu, Pan, and Wang (2010); Ranjan and Prakash (2010); Eichengreen (2011b); Fratzscher and Mehl (2011); Kawai and Takagi (2011);Chen, Peng, and Shu (2011); Gao and Yu (2011);and Chen and Cheung (2011). 51 China's economy passed Japan's in 2010 to attain the world's number 2 ranking. ...
... A recent empirical analysis byPark and Song (2011) shows that among the East Asian economies, the PRC is likely to benefit the least from regional monetary integration. ...
This paper reviews some of the current debates on the reform of the international monetary system. Despite its deficiencies, the United States (US) dollar will remain the dominant currency and Special Drawing Rights (SDR) cannot serve as either an international medium of exchange or a reserve currency. The International Monetary Fund (IMF) has changed its position to accept capital controls under certain circumstances. Refining control instruments better tuned to present day markets may bring about greater acceptance. The 2008–2009 global financial crisis has dimmed much of the earlier hope for the multilateralized Chiang Mai Initiative. The currency swap arrangements portend a new form of international cooperation. Finally, for the Group of Twenty (G20) to matter, the systemically important countries need to ensure the stability of their financial systems and economies.
... 37 Historiquement, la coopération régionale s'est avérée difficile en l'absence de pays dominant et les projets de coopération monétaire régionale en Asie (au-delà de l'accord multilatéral de swap) s'est heurtée à l'absence de leader incontesté. Selon Park et Song (2010), l'émergence du renminbi pourrait affaiblir les initiatives régionales dans le cadre du groupe ASEAN+3, mais donner naissance à un bloc monétaire de facto autour de la monnaie chinoise. Il est possible néanmoins que la Chine retarde l'adoption du flottement précisément pour favoriser l'adoption de sa monnaie au niveau régional (les pays de la région souhaitant aussi une stabilité par rapport au dollar). ...
Bien que le RMB ne soit pas encore convertible, le regime monetaire international a entame une transition vers un systeme plus « multipolaire », dont les piliers pourraient, a terme, etre le dollar, le renminbi et l’euro. Cette evolution ne fait qu’accompagner celle des poids respectifs des differents pays et zones dans l’economie mondiale. Elle pourrait gommer certaines imperfections du (non) systeme monetaire international actuel, comme la rigidite de certains taux de change cles, l’asymetrie des ajustements de balances de paiements ou ce qui demeure du dilemme de Triffin. Elle pourrait cependant exacerber d’autres defauts du systeme monetaire actuel, tels que la volatilite des taux de change ou le risque de « guerres des monnaies ». Enfin, certaines questions, comme la fourniture de liquidite internationale, resteraient irresolues. Ainsi, un regime multipolaire peut s’averer le meilleur comme le pire des systemes, selon le degre de flexibilite des taux de change qui l’accompagne et selon le degre de coordination multilaterale.
... 37 Historically, regional cooperation has proven difficult without a dominant country and plans for monetary cooperation in Asia (beyond the multilateral swap agreements) have so far suffered from the absence of a clear leader. According to Park and Song (2010), the emergence of the renminbi could weaken regional initiatives undertaken by ASEAN+3, but give rise to a de facto monetary bloc with China's currency at the centre. It is however possible that China will resist letting its currency float in the short run, to support its adoption at the regional level (since the countries of the region are generally in demand of stability with respect to the dollar). ...
Though the renminbi is not yet convertible, the international monetary regime has already started to move towards a 'multipolar' system, with the dollar, the euro and the renminbi as its key likely pillars. This shift corresponds to the long-term evolution of the balance of economic weight in the world economy. Such an evolution may mitigate some of the flaws of the present (non-) system, such as the rigidity of key exchange rates, the asymmetry of balance of-payments adjustments or what remains of the Triffin dilemma. However it may exacerbate other problems, such as short-run exchange rate volatility or the scope for ‘currency wars’, while leaving key questions unresolved, such as the response to capital flows global liquidity provision. Hence, in itself, a multipolar regime can be both the best and the worst of all regimes. Which of these alternatives will materialise depends on the degree of cooperation within a multilateral framework.
This study seeks to quantify the rising financial linkages between mainland China, Australia, Hong Kong, New Zealand, and the six largest Association of Southeast Asian Nations (ASEAN group). Stock market co-movements would be consistent with growing trade ties. Our sample runs from 2010 through 2022, including the coronavirus pandemic. Markov switching analysis allows for changing effects as we move from periods of low market volatility to periods of high volatility. The results offer support for the premise that growing trade and investment ties between China, Australasia, Hong Kong, and the ASEAN region have been accompanied by significant financial market integration, as reflected in stock market co-movement. US effects are also significant and tend to be stronger during high-volatility episodes. Under low-volatility conditions, Shanghai effects become more important and are significant for all six ASEAN group countries.
China's rapidly growing role in the world economy has been accompanied by rising bilateral trade with Australia and the Association of Southeast Asian Nations (ASEAN group) as well as expanded offshore renminbi (RMB) markets in the region. Using a Markov-switching analysis that allows for variation across stable and volatile domestic inflation regimes, we find evidence of significant inflation transmission from China to Australia and the five larger ASEAN economies. Chinese inflation effects are further confirmed when we incorporate money supply and commodity price effects within a Markov-switching Vector Autoregressive (MSVAR) framework. The importance of allowing for regime change over our sample period is clear and these inflation effects are shown to generally be stronger during periods when domestic inflation is more volatile. These findings on inflation pass-through from China represent a novel extension to a prior literature that has been primarily limited to real economy and trade effects.
This study uses the DCC-GARCH model to analyze the impact of RMB internationalization on exchange rate linkages in China and four ASEAN countries (Malaysia, Thailand, Philippines, and Indonesia) from 2009 to 2020. The results show that China, as the largest trading partner of ASEAN, has made exchange rate transmission very close between the two economic entities. In the process of RMB internationalization, exchange rate linkages exhibit varying characteristics in distinct stages. In the early stage, the direction of RMB internationalization was unclear, and exchange rate linkages were affected by international capital flows. Afterward, the RMB internationalization, combined with the Belt and Road Initiative, was gradually clarified, promoting a unilateral increase in RMB currency value and a decrease in the linkage level. With the implementation of the initiative, the dividends gradually spread to the four ASEAN countries, bringing the linkages to a peak. Subsequently, unilateral exchange rate reforms of the RMB, such as the ‘811 exchange rate reform,ʻ reduced linkages. After 2017, the cumulative effects of the reforms in the previous period appear. The RMB internationalization has taken shape in ASEAN, and the stability of the exchange rate linkages has been greatly improved.
This article discusses the prospects of the Chinese renminbi (RMB) to expand its sphere of influence and become a full-scale reserve world currency. The methods used in the article are retrospective analysis and graphic analysis. The work is divided into three sections. The first section provides a broad overview of modern reserve currencies. The second part characterizes RMBs shaping as a reserve currency, as well as inner and outer factors that influence its status. The third section includes information about RMBs current status and its perspectives for being a reserve currency in the future. The article argues that currently RMB has already become a regional reserve currency in Asia-Pacific. Chinese government continues to make steps towards international expansion of RMB, yet these steps cannot make RMB one of the leading world currencies together with USD and EUR in the nearest decade.
We analyze the return and volatility connectedness between the three Chinese exchange rate markets, namely, the onshore market, the offshore market, and the nondeliverable forward offshore market. Our results show that connectedness exhibits an increasing trend with fluctuations during periods of internal reforms and external shocks. For example, the connectedness increased with China's exchange rate reform on August 11, 2015 but dropped after that. Furthermore, we document that the offshore spot and a forward market dominated the other rates in return spillovers. In contrast, both the offshore and onshore forward rates dominated the other rates in volatility spillovers.
This paper investigates the degree of connectedness of Asia Pacific forex markets post‐global financial crisis and relates it to developments in the renminbi markets. The connectedness measure developed by Diebold and Yilmaz (2014) (Journal of Econometrics, 182, 119–134) reveal the strength of linkages across the U.S. dollar currency pairs of 12 currencies, namely offshore renminbi, onshore renminbi, euro, yen, Australian dollar, Indian rupee, Korean won, Malaysian ringgit, New Zealand dollar, Singapore dollar, Thai baht and Taiwan dollar. With the gradual liberalization of China's exchange rate system, shocks from the renminbi markets contribute more to fluctuations in almost all individual Asia Pacific currency markets vis‐à‐vis the yen. Rolling regressions show a number of Asia Pacific currencies exhibit tighter association with the renminbi when the latter underwent exchange rate regime reform. Finally, results from a two‐step analysis involving a panel regression provide evidence that time‐varying sensitivities of Asia Pacific currencies to the renminbi are directly related to the countries' trade and financial links with China.
This paper investigates the degree and the nature of exchange rate co-movements between the Renminbi and a set of seven East Asian currencies by estimating Markov switching models with regime-dependent correlations and time-varying transition probabilities. These models have several advantages. First, exchange rate co-movements can vary across different depreciation and appreciation regimes. Second, the Renminbi can act as a transition variable that provides information regarding how the exchange rates evolve over time. After controlling for global effects and exchange market pressures, the results yield robust evidence of the Renminbi's rising role in East Asia as a significant factor in currency fluctuations. A key result is that regional currencies tend to overreact when the Renminbi depreciates and underreact when it appreciates, suggesting that East Asian economies are not willing to allow their currency to substantially appreciate against the Chinese currency.
This paper investigates whether the Chinese RMB has become more influential (than the U.S. dollar) in determining the exchange rates of East Asian currencies in recent years. We use a regression method with time-varying coefficients to trace changes in coefficients over time. The empirical results show that the RMB's effects on East Asian currencies were near zero before 2008, but since then have significantly increased and taken over the role of the U.S. dollar in some countries (Indonesia, Malaysia, and the Philippines). In Singapore and Thailand, the RMB is still a non-factor. South Korea shows an interesting pattern, in that the role of the RMB swings over time, with an increase in the past couple of years. We conjecture that the trade share with China has a positive influence on the role of the RMB. In conclusion, given the small absolute value of the regression coefficient on RMB, although the RMB has attained a more significant status in the currency market, it is too early to talk about the creation of an RMB bloc in East Asia. © 2018 by the Asian Economic Panel and the Massachusetts Institute of Technology.
This paper evaluates the implication of RMB internationalization on economic integration between China and its partners, especially for Belt and Road countries. We collected data for all bilateral swap agreements between 2000 and 2016, and empirically explored the role of bilateral swap agreements in the bilateral trade flows between China and its partner countries. We examined the effects in gravity equation and found a significant positive effect of swap agreements on trade. In our benchmark model, the negotiations of swap agreement would improve 30.4% of bilateral trade values between China and its partners. For Belt and Road countries, the effect is even stronger. This effect is both statistically and economically significant. It is also robust for alternative measure of swap agreements and alternative estimation method. We argue that RMB swap agreements are beneficial for the economic integration between China and Belt and Road countries through facilitating bilateral trade.
Some problems exist in current international monetary system, such as dollar dominance and frequent fluctuation of exchange rate, which are not conducive to the development of trade, investment and global economy. Financial crises break out frequently. So we should reform the international monetary system and create a multi-polar international monetary system to regulate dollar conduct by mutual competitions. RMB internationalization is not only favorable to the stability of the world's currency, but also good to China's own development. The Belt and Road Initiative has been bringing more opportunities for the internationalization of the RMB. The Belt and Road Initiative aims to strengthen economic cooperation between China and its neighboring countries and promotes the regional economic prosperity. This strategy provides a good opportunity for China to develop trade, increase investment and expand financial markets. So RMB should take advantage of this opportunity to improve the proportion of RMB trade settlement, increase the amount of RMB investment and financing and accelerate the circulation of RMB, and then steadily push forward the process of RMB internationalization under the premise of controlling risks.
A country’s rise to economic dominance tends to be accompanied by its currency becoming a reference point, with other currencies tracking it implicitly or explicitly. For a sample comprising emerging market economies, we show that in the last 3 years, the renminbi (RMB) has increasingly become a reference currency which we define as one which exhibits a high degree of co-movement (CMC) with other currencies. In East Asia, there is already a RMB bloc, because the RMB has become the dominant reference currency, eclipsing the dollar, which is a historic development. In this region, 7 currencies out of 10 co-move more closely with the RMB than with the dollar, with the average value of the CMC relative to the RMB being about 60% greater than that for the dollar. We find that co-movements with a reference currency, especially for the RMB, are associated with trade integration. We draw some lessons for the prospects for the RMB bloc to move beyond Asia based on a comparison of the RMB’s situation today and that of the Japanese yen in the early 1990s. If trade were the sole driver, a more global RMB bloc could emerge by the mid-2030s but complementary reforms of the financial and external sector could considerably expedite the process.
The recent financial crisis, rooted in the United States, has changed the world’s economic and financial structures. The Chinese government has made some arrangements in the post-crisis to ensure stable economic growth in volatile international economic environments and to protect its own interests from unfair international monetary treatments. The internationalization of Renminbi (RMB) is one of China's most important national strategies in the 21st century and is symbolic in the rise of China.
Most of the studies on Asia's "decoupling" cover the period before the 2008 global financial crisis. In view of the faster recovery East Asia from the 2008 global economic crisis, it would be interesting to examine whether the crisis has changed the structure of trade linkages and financial spill overs between East Asia and the rest of the world to lend credence to the decoupling thesis. For this purpose, this chapter identifies some of the factors that are likely to cause the decoupling, analyzes East Asia's experience with the 2008 global crisis to examine whether the crisis has strengthened the case for the decoupling, and discusses the prospects for the decoupling in the future.
Since the financial crisis of 1997-1998, East Asian countries have developed many initiatives for monetary and financial cooperation. The global crisis that began in 2007 has further accelerated the process of cooperation. The Multilateralization of the Chiang Mai Initiative in May 2010 became the key element in establishing an Asian Monetary Fund. This strengthening of institutional integration, coupled with an increased economic interdependence, raises issues regarding the possible creation of a de facto currency bloc in the region. The aim of this paper is to explore this hypothesis using nonstationary panel data. The tools of convergence are translated to the exchange rates++++++++++++.
This chapter examines the role of Korea in promoting financial and monetary cooperation in East Asia. This process has been constrained by a lack of cooperation between China and Japan, the two dominant economies. The rise of China as a global economic power makes cooperation even more complicated. Korea finds a dwindling room for mediation between conflicting interests. The 2007-9 global financial crisis has called for a review of Korea's exchange rate policy and its strategy for regional financial and monetary cooperation. The Chiang Mai Initiative went through its first market test and the outcome has not been reassuring. No country considered approaching China and Japan, although several faced liquidity shortages. RMB internationalization will weaken solidarity and undermine both the rationale and cooperative efforts for moving forward with cooperative initiatives, simply because neither Japan nor Korea can join the new RMB area.
This paper examines the dynamic process of convergence among cross-border stock markets in China and ASEAN-5 countries using recursive cointegration analysis. The results show that these six stock markets had at most one cointegrating vector from 1994 to 2002. Overall, the regional financial integration between China and ASEAN-5 has gradually increased. Additionally, the estimated coefficients of error correction terms are statistically significant and negative in China and Indonesia, but the coefficients of other countries are insignificant, meaning that all of the adjustment of this cointegration fell on these two countries' stock markets.
Chinese RMB : Can it Become the Pivotal Currency in the Region ?
The following write-up picks up from the recent decisions taken by the Chinese monetary authorities during the second half of 2010. They led to a first step in the internationalization of the Chinese currency, at least to its regionalization. This move is analyzed in a comparison with what had been done previously in other countries of the region, Japan in particular, based on different rationale and especialy very different consequences. Those were mostly negative. This decision is also put into perspective against analyses written since quite a number of years in China and in reviews released in Hong Kong as well, in order to understand that the decision initiated in July 2010 is also a top-down, “ sui generis” decision” and has to be understood so. It has to be placed on the background of a plan which takes into account several parameters : the request for greater involvement by China into the monetary system and a potential deterioration of the state of the financial and monetary order. In both cases, the various steps taken during the last year can truly make the renminbi play a role as a “ pivot-currency” in the region and this can happen either if this region becomes more integrated within the global monetary and financial system or if the currency “ de-synchronizes”, in the hypothesis of regional financial block being built up.
Classification JEL : F31, F36, F42, 053, P34.
Since the financial crisis of 1997-1998, East Asian countries have developed many initiatives for monetary and financial cooperation. The global crisis that began in 2007 has further accelerated the process of cooperation. The Multilateralization of the Chiang Mai Initiative in 2010 became the key element in establishing an Asian Monetary Fund. This strengthening of institutional integration, coupled with increasing economic interdependence, raises issues regarding the possible creation of a de facto currency bloc in the region. The aim of this paper is to explore this hypothesis using nonstationary panel data. The tools of convergence are translated to the exchange rates and we test, after having defined it, the hypothesis of a currency bloc using the three generations of panel unit root tests. Our resuls show, firstly, a decoupling of East Asian currencies vis-à-vis the dollar and, secondly, the emergence of a convergence towards regional targets.
Korean Abstract: 2013년 10월에 발표된 상하이 자유무역시범구에 대해 전 세계의 많은 관심이 몰렸다. 이는 중국이 제조업 생산 분야에서는 세계 1위를 차지하고 있지만, 아직 금융산업은 규모에 비해서 성숙한 시장을 형성하고 있지 못해서 발전 잠재력이 크기 때문이다. 본 연구는 중국의 금융시장 중에서 채권시장과 외환시장의 변화와 한국에 미치는 영향을 중심으로 분석하였다.English Abstract: Shanghai Pilot Free Trade Zone, announced in October 2013, has attracted attention from around the world. This is because the world has noticed the potential for growth in China’s financial industry, which has yet to attain maturity commensurate with its sheer scale, despite the fact that China has the largest manufacturing industry in the world. This study focuses on analyzing the changes in China’s bond and foreign exchange market and their effects on South Korea.
We investigate the synchronization of growth cycles between China, Japan, the United States and other Asia-Pacific countries using wavelet analysis. While we find that the growth cycles of China, Japan, and the United States are synchronized with the other Asia-Pacific economies, the strength of business cycle synchronization fluctuates across frequencies and over time. Overall, China and other Asia-Pacific countries display a high degree of comovement at long-run developments, especially during and following the recent global financial crisis. Likewise, the strength of business cycle synchronization between Japan and most other Asia-Pacific economies increases at long-run fluctuations, however, for the entire sample period of 1993:2-2012:4. Also, the United States and other Asia-Pacific countries mostly experience a high degree of comovement at frequencies linked with fluctuations that range from between two and four years. Our results thus emphasize the importance of examining the strength of business cycle synchronization using a time-frequency framework.
The “decoupling” of East Asia from its economic interactions – both in trade and finance – with the rest of the world refers to the phenomenon of a weakening of the impact of demand and supply shocks emanating from the advanced countries on the region’s economic performance since the early 1990s. Available empirical evidence, including the faster recovery of East Asia from the 2008 global economic crisis, does not appear to lend credence to the decoupling thesis. However, with increases in income throughout the region and the three free trade agreements of the People’s Republic of China, Japan, and Korea with the Association of Southeast Asian Nations (which have entered into force), East Asia will witness a continuing expansion in intra-regional trade, much of which will consist of horizontal intra-industry trade. At the same time, if East Asia succeeds in instituting an efficient capital control regime and in strengthening the Chiang Mai Initiative Multilateralization, it will be able to cope better with the volatility of capital flows to the region. Together these developments will then help speed up economic integration among ASEAN 3 member states to build a region that is more self-contained than it has been.
Since its launch in September 2006, the Asian Research Programme has focused on policy-oriented studies for central banks and supervisory authorities in the Asia-Pacific region. Under the programme, the BIS Representative Office for Asia and the Pacific has co-organised a series of conferences, seminars and workshops with central banks and supervisory authorities in Asia and the Pacific. The subjects of interest have included improving monetary policy and operations, developing financial markets, maintaining financial stability and strengthening prudential policy. On 19-20 March 2009, the BIS Asian Office and the Bank of Korea co-hosted a high-level seminar on currency internationalisation in Seoul. Participants from 12 central banks as well as academic scholars and BIS economists attended the seminar. The purpose of the seminar was to review experiences of economies in the Asia-Pacific region with currency internationalisation and to assess the prospects for further internationalisation, emphasising the policy implications facing central banks if current trends continue. Lessons learned about currency internationalisation since the intensification of the strains in global markets in mid-2007 were also discussed. This volume is a collection of the speeches, presentations and papers from the seminar.
Summary In this paper, we explore the features of the CFA franc zone and compare them to those of the Economic and Monetary Union (EMU) by operationalizing the criteria for an optimum currency area. A structural vector autoregression method is used in modeling national outputs as determined by global, regional, and country-specific shocks. We find that domestic outputs of the CFA franc zone countries are strongly influenced by country-specific shocks while regional shocks are far more important in European countries that have joined the EMU. The results suggest that the CFA franc zone countries are structurally different from each other and thus are more likely to be subjected to asymmetric shocks. They do not appear to form an optimum currency area and the monetary union may have been a costly arrangement for the member countries unless they are compensated with some other benefits.
This conference is one sign of increased interest in collective or cooperative exchange rate arrangements for East Asian countries. A more concrete indication is the announcement in November 1995 by the Hong Kong Monetary Authority and the central banks of Malaysia, Indonesia and Thailand of repurchase agreements designed to provide one another with exchange market support.2 In February of this year Hong Kong and Singapore agreed to intervene for the account of the Bank of Japan to help the latter manage the dollar/yen rate. In March the Bank of Japan joined the network of repurchase arrangements (as had Singapore and the Philippines sometime earlier). Against this background it is not surprising that the apostles of European monetary integration have chosen this time to bring their message to Asia
Influential empirical work by Rauch and Trindade (REStat, 2002) finds that Chinese ethnic networks of the magnitude observed in Southeast Asia increase bilateral trade by at least 60%. We argue that this estimate is upward biased due to omitted variable bias. Moreover, it is partly related to a preference effect rather than to enforcement and/or the availability of information. Applying a theory-based gravity model to ethnicity data for 1980 and 1990, and focusing on pure network effects, we find that the Chinese network leads to a more modest amount of trade creation of about 15%. Using new data on bilateral stocks of migrants from the World Bank for the year of 2000, we extend the analysis to all potential ethnic networks. We find, i.a., evidence for a Polish, a Turkish, a Mexican, or an Indian network. While confirming the existence of a Chinese network, its trade creating potential is dwarfed by other ethnic networks.
The database described in this article provides researchers with a broad set of data on trade, production, and protection for 28 manufacturing sectors at the three-digit level of the International Standard Industrial Classification, Revision 2. The database covers up to 100 developing and developed countries over the period 1976--2004, but data availability varies by country and year. The trade, production, and protection database is available online and can be freely accessed through the World Bank trade website. Copyright 2007, Oxford University Press.
The authors interpret fluctuations in GNP and unemployment as due to two types of disturbances: disturbances that have a permanent effect on output and disturbances that do not. They interpret the first as supply disturbances, the second as demand disturbances. Demand disturbances have a hump-shaped, mirror-image effect on output and unemployment. The effect of supply disturbances on output increases steadily over time, peaking after two years and reaching a plateau after five years. Copyright 1989 by American Economic Association.
A country's suitability for entry into a currency union depends on a number of economic conditions. These include, inter alia, the intensity of trade with other potential members of the currency union, and the extent to which domestic business cycles are correlated with those of the other countries. But international trade patterns and international business cycle correlations are endogenous. This paper develops and investigates the relationship between the two phenomena. Using thirty years of data for twenty industrialized countries, the authors uncover a strong and striking empirical finding: countries with closer trade links tend to have more tightly correlated business cycles.
Notwithstanding concerns that the dollar’s prospects as a reserve currency have been dimmed by the crisis, there has been no actual diminution of the dollar’s international role. The dollar will remain the principal form of international reserves for the foreseeable future.
The 10th anniversary of the euro is an excellent opportunity to explore the role of the euro as an international currency, and some consequences of this role. For this conference I have been asked to address the issue of the use of euros and dollars in international trade transactions. Specifically, I will explore the extent to which export and import transactions are invoiced in dollars, and reasons for these choices. Also, I will comment on some related consequences for international transmission of shocks and for monetary policy effectiveness. I will not, however, address the value of euros or dollars, which is a very different concept than the role and consequences discussed here; nor will I turn to the extensive evidence about the extent to which dollars and euros are used in exchange rate arrangements, central bank foreign exchange reserve portfolios, or in a broad range of international financial transactions. For instance, substantial changes have occurred in corporate bond issuance, particularly in growth of the euro's use in international bond issuance. Specifics on the role of euros and dollars in international financial transactions are well exposited in an excellent report published by the ECB, 1 The views expressed in this paper are those of the individual author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Linda Goldberg is a vice president at the Federal Reserve Bank of New York and Visiting Officer at the Board of Governors of the Federal Reserve System.
Developing Asia has traditionally relied on exports to the United States (US) and other industrialized countries for demand and growth. As a result, the collapse of exports to the US and other industrialized countries during the global financial and economic crisis has sharply curtailed gross domestic product (GDP) growth across the region. The emergence of the People’s Republic of China (PRC) as a globally influential economic force is fueling hopes that it can supplement the US as an additional source of demand and growth. The central objective of this paper is to use vector autoregression (VAR) models to empirically investigate whether exports to the PRC have a significant and positive effect on the GDP of nine developing Asian countries. The study’s results from a three-variable VAR model indicate that PRC’s imports have a significant positive effect on the GDP of regional countries. However, the study’s results from a four-variable VAR model indicate that the PRC’s apparently positive impact reflects the US’ demand for Asian goods, rather than independent demand from the PRC. Therefore, overall, the study’s evidence suggests that the PRC is not yet an engine of growth for the rest of the region.
Since the 2008 global financial crisis, China has rolled out a number of initiatives to actively promote the international role of the renminbi and to denominate more of its international claims away from the US dollar and into the renminbi. This paper discusses the factors shaping the prospects of internationalising the renminbi from the perspective of the currency composition of China’s international assets and liabilities. These factors include, among others, underlying valuation and management of the renminbi.
This paper presents a new concept – the global roles of currencies. The concept combines the domestic and international (cross-border) use of currencies, and therefore captures the overall importance of different currencies in a globalized economy. The measure of a currency's global role is based on the size and stage of development of the underlying economy, as well as the size and stage of development of its financial markets and the scope of financial instruments available in this currency. The paper applies the concept to 22 currencies of advanced and emerging economies. The results confirm the well-known ranking for the leading currencies – in particular the US dollar and the euro – but give considerably greater weight to currencies of emerging economies than the results obtained from the international debt market, which has so far been used as the basis for measuring the international role of currencies in capital markets. The paper also discusses this established measure in detail, arguing that in view of financial globalization, an indicator based on currency shares in the international debt market alone represents a decreasing share of international financial market activity, as this market excludes government debt, other domestic debt and equities, which are increasingly of interest to international investors. The paper also presents an empirical application of the new global concept to examine cross-border portfolio holdings in debt and equity markets across advanced and emerging economies. It finds that the global role indicator is positively correlated with such holdings and, especially for emerging economies, fares better than the established international debt market indicator. The findings suggest a positive relationship between domestic financial development and international financial integration.
World trade has become increasingly regionalized in the past decade as a result of preferential arrangements. Due to Taiwan's unique international political status, its present government believes that closer economic integration with China would enhance Taiwan's economic prosperity and prevent Taiwan from being marginalized in East Asia. Taiwan hence signed the Economic Cooperation Framework Agreement (ECFA) with China in 2010. This paper summarizes arguments opposed to the ECFA from economic and political perspectives. Despite the fact that Taiwan is expected to reap greater benefits from deeper integration with China, simulation analyses show that the welfare-enhancing effect brought about by the ECFA is quite limited, because the ECFA contains no definite content or timeline other than an early harvest list. © 2011 The Earth Institute at Columbia University and the Massachusetts Institute of Technology.
Developing Asia has traditionally relied on exports to the United States and other industrialized countries for demand and growth. As a result, the collapse of exports to the United States and other industrialized countries during the 2008–09 global financial crisis has sharply curtailed GDP growth across the region. The emergence of the People's Republic of China (PRC) as a globally influential economic force is fueling hopes that it can supplement the United States as an additional source of demand and growth. The central objective of this paper is to investigate whether exports to the PRC has a significant and positive effect on the GDP of eight developing Asian countries. Although the study's results indicate that exports to the PRC contributed to developing Asian countries' recovery from the global crisis, it is far too early to make well-informed judgments about the PRC's ability to support Asia's growth in the medium and long term. © 2011 The Earth Institute at Columbia University and the Massachusetts Institute of Technology.
The Chinese authorities described the management of the renminbi after its 2005 unpegging from the US dollar as involving a basket of trading partner currencies. Outside analysts have detected few signs of such management. We find that, in the 2Â years from mid-2006 to mid-2008, the renminbi strengthened gradually against trading partners' currencies within a narrow band. In mid-2008, the financial crisis interrupted this experiment and the bilateral renminbi/dollar exchange rate stabilised at 6.8. The 2006-2008 experience suggests that a shared policy of gradual nominal effective appreciation renders East Asian currencies quite stable against one another. Such a shared policy would create favourable conditions for regional monetary cooperation.
In this paper we investigate the feasibility of a common currency peg in East Asia from the perspective of Western European countries. We find that domestic outputs of East Asian countries are strongly influenced by country-specific shocks while regional shocks are far more important in European countries that have joined the Economic and Monetary Union. The results are robust to various changes in specifications of the model. They suggest that East Asian countries are structurally different from each other and thus more likely to be subject to asymmetric shocks. Based on optimum currency area grounds, a common currency peg in East Asia would be more costly and difficult to sustain.
The Maastricht Treaty, signed in December 1991, set a timetable for the European Community's economic and monetary union (EMU) and clearly defined the institutional policy changes necessary for its achievement. Subsequent developments have demonstrated, however, the importance of many key issues in the transition to EMU that were largely neglected at the time. This volume reports the proceedings of a joint CEPR conference with the Banco de Portugal, held in January 1992. In these papers, leading international experts address the instability of the transition to EMU, the long-run implications of monetary union and the single market for growth and convergence in Europe. They also consider the prospects for inflation and fiscal convergence, regional policy and the integration of financial markets and fiscal systems. Attention focuses on adjustment mechanisms with differentiated shocks, region-specific business cycles and excessive industrial concentration and the cases for a two-speed EMU and fiscal federalism.
This paper emphasizes the importance of the denomination of financial assets rather than trade invoicing as a long-term determinant of an international currency. China needs to liberalize and open its financial system and make the RMB fully convertible, and to adopt a more flexible exchange rate system to speed up its currency internationalization, for which China could follow either a global or regional approach. The global approach is a riskier and more unpredictable strategy because it would demand a scope and timeframe of financial liberalization that is likely to be beyond China's institutional capacity over the coming decade. There are two options that could be taken in following the regional approach. One is creating an ASEAN+New 3 (the Chinese Mainland, Hong Kong, and Taiwan) RMB bloc and the other is liberalizing China's financial industries and internationalizing the RMB by playing a leading role in East Asia's economic integration within the framework of ASEAN+3. This paper concludes that the latter is a more realistic and effective approach for China. Copyright (c) 2010 The Author Journal compilation (c) 2010 Institute of World Economics and Politics, Chinese Academy of Social Sciences.
Previously published as an Appendix to the World development report. Incl. users guide, list of acronyms, bibl., index. The Little data book is a pocket edition of WDI
We find that ethnic Chinese networks, proxied by the product of ethnic Chinese population shares, increased bilateral trade more for differentiated than for homogeneous products. This suggests that business and social networks have a considerable quantitative impact on international trade by helping to match buyers and sellers in characteristics space, in addition to their effect through enforcement of community sanctions that deter opportunistic behavior. For trade between countries with ethnic Chinese population shares at the levels prevailing in Southeast Asia, the smallest estimated average increase in bilateral trade in differentiated products attributable to ethnic Chinese networks is nearly 60%. © 2001 by the President and Fellows of Harvard College and the Massachusetts Institute of Technolog
As trade integration deepens in East Asia, closer links among the business cycles of East Asian countries can be expected. Theoretically, however, increased trade could lead to either closer or looser business cycles across trading partners. This paper seeks to understand how the business cycles of 12 Asian economies have been influenced by increased trade among them. It finds that the increasing trade itself is not necessarily associated with an increased synchronization of their business cycles. Intra-industry trade, rather than inter-industry trade or the volume of trade itself, is the major channel through which their business cycles become synchronized. This result has important implications for the prospects for a unified currency in the region. Copyright (c) 2004 The Earth Institute at Columbia University and the Massachusetts.
In this paper I re-examined the trade enhancing effects of ethnic Chinese networks, found by Rauch and Trindade (2002), on a newer and extended data set. The effects are estimated by the gravity equation with the product of the population ratio (or absolute number) of the ethnic Chinese in both the importing and exporting countries, and are reaffirmed positive and statistically significant. I also compared the effects of two different ethnic Japanese networks, i.e., the networks of long-term Japanese stayers in foreign countries, and the networks of permanent Japanese residents in foreign countries. It is found that the former has stronger trade enhancing effects than the latter. This shows that the effects of ethnic networks on international trade can be generalized beyond the ethnic Chinese, and the ’cohesiveness’ of the ethnic network matters to the trade enhancing effects of the network.
This paper tests the present readiness of Slovakia to join the European Monetary Union (EMU) based on the classical Optimum Currency Area criteria, the degree of trade intensity and business cycle synchronization. The results do not fully confirm the hypothesis that Slovakia already constitutes an optimum monetary union with the rest of the EMU countries mainly the labour mobility is largely ineffective as adjustment mechanism. But, Slovakia is a open economy, its degree of trade integration is the highest among the Central and Eastern European countries and its economic and production structures are quite similar to the intra-EMU average. Moreover, Slovakia's business cycle appears at least as highly synchronized with the EMU''s one as some present, small and peripheral EMU member countries. This would indicate that this country is equally a suitable candidate for the EMU membership and that the Euro adoption should not increase the likelihood of asymmetric shocks.
One Money or Many? Analyzing the Prospects for Monetary Uniªcation in Various Parts of the World The Dynamic Effects of Aggregate Demand and Supply Disturbances
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