The Renminbi Bloc is Here: Asia Down, Rest of the World to Go?

Abstract

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 three years, the renminbi (RMB) has increasingly become a reference currency, which we define as one that exhibits a high degree of co-movement with other currencies. In East Asia, there is already a RMB bloc, because the RMB has become the dominant reference currency, eclipsing the US 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 co-movement coefficient relative to the RMB being about 60 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 sectors could considerably expedite the process. JEL Codes: F31, F33

Is There Really a Renminbi Bloc in Asia?

“…In this paper we demonstrate that the evidence provided by Henning (2012) and Subramanian and Kessler (2013) of an alleged formation of an RMB bloc should be treated with utmost caution. On the basis of rolling regression estimates of the same Frankel-Wei regression that these two studies employed, we have found that the collinearity between the movements in the RMB and the US dollar remains a major concern even during those periods during which the RMB exhibited some flexibility against the US dollar.…”

“…Recent evidence provided by Henning (2012) and Subramanian and Kessler (2013) indicates that there has, indeed, been an alleged formation of an RMB bloc in East Asia. On the basis of the widely-used Frankel-Wei regression model that includes the movements of the RMB on the right-hand side of the equation, they obtained estimated weights of the RMB that are not only strongly significant but also larger in value than the estimates for the US dollar for a number of East Asian currencies during recent periods when the exchange rate of the RMB has been reasonably flexible.…”

“…Several recent studies have examined whether the RMB has started to figure in the currency baskets of individual economies, particularly in the Asian region-e.g., Ho, Ma, and McCauley (2005);Balasubramaniam, Patnaik, and Shah (2011);Chow (2011);Fratzscher and Mehl (2011);Henning (2012);and Subramanian and Kessler (2013). These employed the FrankelWei regression model by including movements in the RMB on the right-hand side of the equation such as the one below:…”

“…For instance, Henning (2012) and Subramanian and Kessler (2013) conducted regression estimates using the standard version of the Frankel-Wei regression model that includes the movements in the RMB on the right-hand side during the periods in which the RMB exhibited relative flexibility against the US dollar. Both studies concluded that an RMB bloc had emerged in the Asian region.…”

The Structural Behavior of China-U.S. Trade Flows

“…13 See, for example Fratzscher and Mehl (2014), McKinnon and Schnabl (2003), Subramanian and Kessler (2013). Note: Columns (1) and (4), Columns (2) and (5), and Columns (3) and (6) report results when the RER variable is the CPI based RER, the one from the two-stage estimation method, and the deviation from the equilibrium levels.…”