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The Renminbi and Exchange Rate Regimes in East Asia

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The Renminbi and Exchange Rate Regimes in East Asia A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Kawai, Masahiro; Pontines, Victor Working Paper The renminbi and exchange rate regimes in East Asia ADBI Working Paper, No. 484 Provided in Cooperation with: Asian Development Bank Institute (ADBI), Tokyo Suggested Citation: Kawai, Masahiro; Pontines, Victor (2014) : The renminbi and exchange rate regimes in East Asia, ADBI Working Paper, No. 484, Asian Development Bank Institute (ADBI), Tokyo This Version is available at: http://hdl.handle.net/10419/101164 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu ADBI Working Paper Series The Renminbi and Exchange Rate Regimes in East Asia Masahiro Kawai and Victor Pontines No. 484 May 2014 Asian Development Bank Masahiro Kawai is Project Professor at the Graduate School of Public Policy, University of Tokyo. Victor Pontines is Research Fellow at the Asian Development Bank Institute, Tokyo. The authors are grateful for the excellent research assistance provided by Shigeru Akiyama and Kensuke Yanagida. In this report, “$” refers to US dollars, unless otherwise stated. The views expressed in this paper are the views of the author and do not necessarily reflect the views or policies of ADBI, ADB, its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms. The Working Paper series is a continuation of the formerly named Discussion Paper series; the numbering of the papers continued without interruption or change. ADBI’s working papers reflect initial ideas on a topic and are posted online for discussion. ADBI encourages readers to post their comments on the main page for each working paper (given in the citation below). Some working papers may develop into other forms of publication. Suggested citation: Kawai, M., and V. Pontines. 2014. The Renminbi and Exchange Rate Regimes in East Asia. ADBI Working Paper 484. Tokyo: Asian Development Bank Institute. Available: http://www.adbi.org/working-paper/2014/05/30/6303.renminbi.exchange.rate/ Please contact the authors for information about this paper. Email: [email protected]; [email protected] Asian Development Bank Institute Kasumigaseki Building 8F 3-2-5 Kasumigaseki, Chiyoda-ku Tokyo 100-6008, Japan Tel: +81-3-3593-5500 Fax: +81-3-3593-5571 URL: www.adbi.org E-mail: [email protected] © 2014 Asian Development Bank Institute ADBI Working Paper 484 Kawai and Pontines Abstract With the rise of the People’s Republic of China (PRC) as the world’s largest trading nation (measured by trade value) and second largest economic power (measured by GDP), its economic influence over the neighboring emerging economies in East Asia has also risen. The PRC introduced some exchange rate flexibility in July 2005, and in the wake of the global financial crisis has been pursuing a policy to internationalize its currency, the renminbi (RMB). Clearly the exchange rate policy of the PRC has significant implications for exchange rate regimes in emerging East Asia. This paper examines the behavior of the RMB exchange rate and the impact of RMB movements on those of other currencies in emerging East Asia during the period 2000–2014. We apply the Frankel–Wei regression model to identify changes in the RMB exchange rate regime over time and a modified version of the model, developed by the authors in their earlier paper, to estimate the RMB weight in an emerging East Asian economy’s currency basket. We find that the US dollar continues to be the dominant anchor currency in the region, while the RMB has taken on increasing importance in the currency baskets of many East Asian economies in recent years. The paper also explores how monetary and currency cooperation—led by the PRC and Japan— can promote intra-East Asian exchange rate stability under the pressure of rising financial market openness in the PRC. JEL Classification: F15, F31, F36, F41, O24 ADBI Working Paper 484 Kawai and Pontines Contents 1. Introduction ................................................................................................................ 3 2. Rise of the People’s Republic of China’s Economy and Renminbi Internationalization..................................................................................................... 4 2.1 Rise of the People’s Republic of China’s Economy and Trade ....................... 4 2.2 Renminbi Internationalization ......................................................................... 5 2.3 Capital Account Liberalization ........................................................................ 7 3. Evolution of the People’s Republic of China’s Exchange Rate Regime ...................... 9 3.1 Exchange Rate Behavior ............................................................................... 9 3.2 International Monetary Fund Classification of the People’s Republic of China’s Exchange Rate Regimes ................................................................. 11 3.3 Changes in the People’s Republic of China’s Observed Exchange Rate Regimes ....................................................................................................... 13 3.4 Factors behind a High Degree of Exchange Rate Stability in the People’s Republic of China ......................................................................................... 15 4. Role of the Renminbi in the Exchange Rate Regimes of Emerging Asian Economies ............................................................................................................... 16 4.1 Exchange Rate Behavior of East Asian Currencies ...................................... 16 4.2 Evolution of International Monetary Fund-Defined Exchange Rate Regimes in East Asia ................................................................................... 20 4.3 Role of the Renminbi in East Asian Currency Baskets ................................. 23 5. Monetary and Currency Cooperation in East Asia.................................................... 29 5.1 The US Dollar, Renminbi, or Yen as Anchor for East Asia? ......................... 30 5.2 A Case for Currency Basket Systems .......................................................... 31 5.3 Financial Cooperation .................................................................................. 32 6. Conclusion ............................................................................................................... 33 References ......................................................................................................................... 35 ADBI Working Paper 484 Kawai and Pontines 1. INTRODUCTION The recent rise of the PRC as the world’s largest trading nation (measured by trade value) and second largest economic power (measured by GDP) has been accompanied by the PRC’s greater economic influence over emerging economies in East Asia.1 The dependence of these economies on the PRC through trade and investment has risen over time. The PRC used to peg its currency, the renminbi (RMB), tightly to the US dollar, but over the last 10 years it has engineered currency appreciation against the dollar by allowing a certain degree of exchange rate flexibility. The PRC shifted its exchange rate arrangement from a conventional US dollar peg to a crawling peg regime in July 2005. Although it temporarily restored a conventional US dollar peg regime in August 2008–May 2010, it once again shifted to a crawling-peg-like regime in June 2010. In general, the degree of exchange rate flexibility has increased over time. In addition, the PRC has been pursuing a policy of internationalizing the RMB in the wake of the global financial crisis. The authorities started to allow firms to settle merchandise trade in RMB, foreigners to hold offshore RMB deposits, and foreigners to issue offshore RMB bonds. In addition, a series of bilateral currency swap arrangements have been concluded between the People’s Bank of China (PBC) and foreign central banks to enable the latter to hold RMB and sell them to their importers who wish to pay for exports from the PRC in RMB. Because of the rising economic importance of the PRC, its influence through expanding trade, and the RMB internationalization policy, the exchange rate policy of the PRC is likely to have significant implications for exchange rate regimes in emerging
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