The RMB’s global role as an anchor currency : no evidence
Heimonen, Kari; Rönkkö, Risto (23.04.2024)
Numero
5/2024Julkaisija
Bank of Finland
2024
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi-fe2024042321049Tiivistelmä
This study examines the role of the Chinese renminbi (RMB) as an international anchor currency. After China abandoned its tight US dollar (USD) peg in 2005, the RMB found greater popularity as a reserve currency. This change in the RMB’s role reflected China’s growing presence in the global economy, even challenging the USD in some of the 155 countries that signed on to the Belt and Road initiative (BRI). Modifying the approach of Ahmed (2021) to estimate basket weights in exchange rate policy for the currencies of 63 advanced and emerging economy currencies, we account for potential drivers of the exchange rate omitted in previous studies to obtain unbiased anchor weight estimates. Unlike earlier studies, we find that the RMB’s anchor weight in exchange rate policies remains low irrespective of China’s global role. Overall, the weight of the RMB averaged 6 %, compared to an average share of 58 % for the USD and 35 % for the euro. We also find that the USD, euro and yen anchor choices are strongly interlinked. A change in the anchor weight of any of these three currencies results in a strong opposite change in the weights of other two. Changes in RMB anchoring, however, do not materially impact USD, euro and yen weights. An increase in financial markets volatility leads developing countries to increase anchor weights of the developed countries currencies USD, euro and yen. Heightened geopolitical uncertainty only increases the weights of the USD and euro.
Julkaisuhuomautus
NON-TECHNICAL SUMMARY
FOCUS
China’s growing role in the global economy has raised interest in the internationalization of the renminbi (RMB). In this paper we study one aspect of the internationalization, use of the RMB as a pegging currency. The RMB’s importance as an international currency is increasing. Moreover, already now China is the most important trading partner for many countries, and source of capital. These all are expected to increase the RMB role as the pegging currency. We provide new evi-dence of the importance of RMB as a pegging currency and examine also the factors driving the RMB peg.
CONTRIBUTION
Estimation of the anchor weights involves regressing domestic currency exchange rate change with respect to anchor currency exchange rate changes and common shocks hitting both domestic and anchor currency exchange rates. We argue that the previous studies have not adequately controlled the common shocks, which potentially biases the anchor weight estimates. Moreover, in earlier studies exchange rate policy is often imprecisely controlled, if controlled at all. Due to measure-ment error, this is another potential source of bias. We control the common shocks as exhaustively as possible. Also, with help of two novel datasets, we aim to control foreign exchange rate policy in our regression as precisely as possible. Lastly, previous studies’ exploration of the RMB’s global role ends in the early 2010s. Our analysis with 63 countries for the period 2010-2018 provides fresh evidence on the issue.
FINDINGS
We find that the use of the RMB as an anchor currency is still low, 6 percent on average. The United States dollar and the euro are still the most common anchor currency with 58 percent and 35 percent average shares, respectively. Anchoring with the dollar, euro and yen is strongly inter-linked, a change in the anchor weight of any of the three translates to strong opposite change in the weights of other two. We also find that the increased geopolitical uncertainty had impacts on the currency pegs as heightened uncertainty increased the anchor weights of the USD and euro.
FOCUS
China’s growing role in the global economy has raised interest in the internationalization of the renminbi (RMB). In this paper we study one aspect of the internationalization, use of the RMB as a pegging currency. The RMB’s importance as an international currency is increasing. Moreover, already now China is the most important trading partner for many countries, and source of capital. These all are expected to increase the RMB role as the pegging currency. We provide new evi-dence of the importance of RMB as a pegging currency and examine also the factors driving the RMB peg.
CONTRIBUTION
Estimation of the anchor weights involves regressing domestic currency exchange rate change with respect to anchor currency exchange rate changes and common shocks hitting both domestic and anchor currency exchange rates. We argue that the previous studies have not adequately controlled the common shocks, which potentially biases the anchor weight estimates. Moreover, in earlier studies exchange rate policy is often imprecisely controlled, if controlled at all. Due to measure-ment error, this is another potential source of bias. We control the common shocks as exhaustively as possible. Also, with help of two novel datasets, we aim to control foreign exchange rate policy in our regression as precisely as possible. Lastly, previous studies’ exploration of the RMB’s global role ends in the early 2010s. Our analysis with 63 countries for the period 2010-2018 provides fresh evidence on the issue.
FINDINGS
We find that the use of the RMB as an anchor currency is still low, 6 percent on average. The United States dollar and the euro are still the most common anchor currency with 58 percent and 35 percent average shares, respectively. Anchoring with the dollar, euro and yen is strongly inter-linked, a change in the anchor weight of any of the three translates to strong opposite change in the weights of other two. We also find that the increased geopolitical uncertainty had impacts on the currency pegs as heightened uncertainty increased the anchor weights of the USD and euro.