The Renminbi in Asian Exchange Rate Dynamics: Evidence For Its Non-Monotonic Trajectory in Becoming Asia’s Reference Currency

Abstract

This paper examines the role of the renminbi in the exchange rate dynamics of Asianeconomies. The analysis focuses on whether the renminbi will play an increasinglyimportant role in Asian foreign exchange regimes to replace the U.S. dollar as the region’sreference currency. We conduct unconditional and conditional analyses based on athree-factor and four-factor model of foreign exchange returns, using a panel data of dailyexchange rate returns of 47 currencies across the years 1997 to 2016. This is the first paperto conclude that during the period of sustained renminbi depreciation of 2015-2016, therenminbi’s influence on Asian exchange rate configurations has moderately weakened whilethat of the U.S. dollar has strengthened. We were able to derive results that depart fromearlier literature, because past studies have focused entirely on the renminbi appreciationperiod. We find that a depreciation of the renminbi has dampened its rise as a majorreference currency. Indeed, the renminbi’s trajectory in becoming Asia’s reference currencyis not monotonic and is contingent upon the renminbi’s stability and strength. Theseresults are particularly relevant, given that China’s internationalization of the renminbiand its recent inclusion into the SDR basket have made the currency a prevalent andrelevant issue within the international monetary system.