An Analysis on the Correlation Between RMB Exchange Rate Fluctuation and East Asian Exchange Rate Fluctuations

Abstract

Article HistoryBefore 2005 July 21st, RMB exchange rate was pegged to US Dollar and adopted a fixed exchange rate. The correlation between RMB exchange rate and exchange rates of other East Asian economies was not significant. Empirical findings indicated that since Mainland China changed its exchange rate regime to a basket of currencies on July 22nd, 2005, in addition to the insignificant correlation between RMB exchange rate and exchange rates of Hong Kong, Malaysia, Thailand, and Indonesia duration the certain period, the correlation between exchange rate fluctuations of RMB and other East Asian economies is significantly related. This shows that the exchange rate regime of East Asian economies is mostly pegged to a basket of currencies. In order to avoid effects of exchange rate fluctuations from other countries on trade interests, exchange rate fluctuations of East Asian economies have a clear regional linkage. However, Mainland China's exchange rate policy is gradually becoming more open, causing RMB exchange rate fluctuations to become an important reference for overall exchange rate structure in East Asia. RMB internationalization will continue in the future, crossborder trade with RMB settlement increasing, and RMB offshore market size will also expand. And currently Mainland China is leading East Asian economic and trade integration; hence RMB exchange rate fluctuations will have a significant impact on exchange rate fluctuations of other East Asian economies in the foreseeable future. Contribution/ Originality:This study is one of very few studies which have investigated and found that after PRC started RMB exchange rate reform in 2005, RMB has become an important international currency in East Asia. Hence RMB exchange rate fluctuations have a significant impact on exchange rate fluctuations of East Asia.