Determinants of the renminbi anchor effect: From the perspective of the belt and road initiative

Abstract

The scope of this study is to empirically test the renminbi's (RMB) anchor effect. Since the proposal of the Belt and Road (B&R) Initiative, the RMB is shown to have made more remarkable progress as an anchor currency in B&R countries compared to non‐B&R countries. The ordered logit model is then used to examine the determinants of the RMB anchor effect. The results show that the probability of the RMB being an anchor currency increases with the higher the trade integration, the higher the investment dependence, the better the RMB infrastructure and the closer the policy cooperation. The results also provide evidence on how to further strengthen the RMB anchor effect and promote the RMB internationalization in the long run. On the basis of strengthening its policy cooperation with B&R countries, China should use its sustainable growth of trade and investment to provide the impetus for RMB internationalization. Furthermore, it should optimize the layout of the RMB offshore market, increase the openness of the financial market, and strengthen currency cooperation among central banks to provide guarantees for RMB internationalization.

The Risk Management in Belt and Road

“…Based on the B&R framework, RMB is a good choice. The role of RMB in the countries along the B&R exceeds that of non-B&R countries [11].…”

Current Status and Promotion of the Circulation of RMB: Taking the Belt and Road Initiative as an Example

“…With the Belt and Road regional cooperation mechanism, using RMB as the trade settlement currency and expanding the scale of trade will effectively promote the circulation of RMB in the region (Du & Hu, 2021). What's more, China seeks to enhance financial cooperation with countries along the Belt and Road， improving payment and settlement infrastructure (Chen & Cheng, 2019;Lin, 2021;Cai, 2022). It would make more central banks of countries along the Belt and Road more willing to hold RMB-denominated assets as reserves.…”

The impacts of RMB internationalization on onshore and offshore RMB markets

“…Under the circumstance that the RMB has not been freely convertible, the establishment of the offshore RMB market ensures the circulation and transaction of the offshore RMB, paving the way for RMB internationalization. With the successive introduction of policies related to the trade account, direct investment, and capital market internationalization, the offshore market is further promoting RMB internationalization through the gradual improvement of the RMB backflow mechanism (Cai, 2022). The offshore market has very different characteristics from the onshore market although both are RMB trading markets.…”

“…In the long run, cross-country differences in sectoral total factor productivity may be one of the reasons driving persistent changes in real exchange rates over time and across countries (Berka et al, 2018). However, China is promoting capital market internationalization, exchange rate liberalization, and capital account convertibility in an orderly manner (Cai, 2022). The situation in China is quite different from other countries.…”