Observations on Renminbi s Course

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1 Observations on Renminbi s Course Menzie D. Chinn University of Wisconsin, Madison and NBER ACAES Panel Can the Chinese Renminbi Rule? If So, How and When? ASSA, San Francisco January 4, 2015

2 What does it mean by rule RMB as a global international currency? RMB as regional international currency? RMB as a reserve currency? RMB as anchor currency? 2

3 Roles of an International Currency Table 1: Function of money Governments Private actors Store of value International reserve holdings Currency substitution (private dollarization) Medium of exchange Unit of account Source: Kenen (1983) Vehicle currency for foreign exchange intervention Anchor for pegging local currency Invoicing trade and financial transactions Denominating trade and financial transactions

4 Roles of an International Currency Table 1: Function of money Governments Private actors Store of value International reserve holdings Currency substitution (private dollarization) Medium of exchange Unit of account Source: Kenen (1983) Vehicle currency for foreign exchange intervention Anchor for pegging local currency Invoicing trade and financial transactions Denominating trade and financial transactions

5 China s Economic Mass Implies a Role US Euro Area.12 China.08 Share of.04 world GDP, in USD

6 A Logistic Transform - Graphical Source: Chinn and Frankel,

7 Determinants, again (1)The pattern of output and trade. (2)Financial markets (3)Confidence in the currency (4)Network externalities 7

8 Key Estimates, using Logit Source: Chinn and Frankel,

9 GDP Source: IMF, World Economic Outlook, April 2014 database 9

10 Geography of FX Trading (Proxy for Financial Development) Source: Chinn (2015) 10

11 Financial Development Source: Chinn (2015) 11

12 Financial Development Source: Chinn (2015) 12

13 Financial Development Source: Chinn (2015) 13

14 Institutional Development 14

15 Financial Openness (Chinn-Ito) Source: Chinn (2015) 15

16 Financial Openness Is Key (Partly because it drives financial development) Source: Chen and Qian (2015) 16

17 Financial Openness Is Increasing Source: Chen and Qian (2015) 17

18 Roles of an International Currency Table 1: Function of money Governments Private actors Store of value International reserve holdings Currency substitution (private dollarization) Medium of exchange Unit of account Source: Kenen (1983) Vehicle currency for foreign exchange intervention Anchor for pegging local currency Invoicing trade and financial transactions Denominating trade and financial transactions

19 And Invoicing in RMB Is Increasing Predicted Source: Ito and Chinn (2015) 19

20 Getting to the Requisite Level of Financial Development Requires much fuller crossborder/domestic liberalization China Reserves ex.-gold, trn USD [right axis] Which implies loss of policy autonomy during a period of slackening growth, weak external economy Log real CNY [left axis]

21 Roles of an International Currency Table 1: Function of money Governments Private actors Store of value International reserve holdings Currency substitution (private dollarization) Medium of exchange Unit of account Source: Kenen (1983) Vehicle currency for foreign exchange intervention Anchor for pegging local currency Invoicing trade and financial transactions Denominating trade and financial transactions

22 RMB as Anchor Currency Do other currencies peg or manage against the RMB instead of USD or EUR? 22

23 RMB as Anchor (I) Indonesia Taiwan China Singapore Malaysia Log SDR exchange rates, 2005M06= Thailand Source: Chinn (2014)

24 RMB as Anchor (II) Indonesia Thailand Malaysia -.04 Taiwan China Log SDR exchange rates, 2010M06=0 Singapore

25 Exchange Rate Factors Formalize using Frankel-Wei approach to infer weights

26 Exchange Rate Factors & Long Run Need a specification allows for both short and long run dynamics Estimated with monthly data Allows for the effects of financial stress

27 Source: Chinn (2014)

28 The RMB Zone: Findings In the pre-2005 period, little evidence of long run relationships between CNY, USD, JPY and respective currencies Post-2005, there is greater evidence of cointegration And more anchoring on the CNY Exception: KRW

29 Final Question and Conclusion What price RMB internationalization in terms of policy autonomy are Chinese policymakers willing to pay? I doubt whether full capital convertibility will be achieved in the next five years (and that s not even tackling domestic financial deregulation) Hence, the RMB will be/is an important regional currency but only very eventually an international one 29

30 References Chinn, Menzie, 2015, Emerging Market Economies and the Next Reserve Currencies, Open Economies Review 26(1): Chinn, Menzie and Jeffrey Frankel, 2007, Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency? in R. Clarida (ed.), G7 Current Account Imbalances: Sustainability and Adjustment (U. Chicago Press), pp Chinn, Menzie Global Supply Chains and Macroeconomic Relationships in Asia, in Asia and Global Production Networks, edited by Benno Ferrarini and David Hummels (Edward Elgar for ADB, 2014). Ito, Hiro and Menzie Chinn, 2015, The Rise of the Redback and China s Capital Account Liberalization: An Empirical Analysis on the Determinants of Invoicing Currencies, in Renminbi Internationalization: Achievements, Prospects, and Challenges, edited by Barry Eichengreen and Masahiro Kawai (Brookings Institution Press for ADBI, 2015). 30

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