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

38 Pages Posted: 25 Jul 2013 Last revised: 5 Nov 2014

See all articles by Arvind Subramanian

Arvind Subramanian

International Monetary Fund (IMF); Center for Global Development

Martin Kessler

Peter G. Peterson Institute for International Economics

Date Written: August 1, 2013

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.

Keywords: Exchange rates, China, renminbi, currency internationalization, reserve currency

JEL Classification: F31, F33

Suggested Citation

Subramanian, Arvind and Kessler, Martin, The Renminbi Bloc is Here: Asia Down, Rest of the World to Go? (August 1, 2013). Peterson Institute for International Economics Working Paper No. 12-19, Available at SSRN: https://ssrn.com/abstract=2298011 or http://dx.doi.org/10.2139/ssrn.2298011

Arvind Subramanian (Contact Author)

International Monetary Fund (IMF) ( email )

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United States

Center for Global Development

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Martin Kessler

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

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