How do the Chinese authorities fix the centre of the renminbi's daily trading band? To what extent do other emerging market currencies track renminbi moves against the dollar? Both questions interest policymakers, academics and market participants. Their interest only grew more intense when the renminbi fixing reform in August 2015 shook global markets. This working paper finds that the answers to these two questions are closely related.
We find that recent variation in the renminbi's daily fixing maps onto how emerging market currencies move with the renminbi. We first identify three phases of the fixing since its reform in August 2015. We label them as the transition, basket management and countercyclical management phases. These differ in the strength of the fixing's response to lagged market moves. We then measure how much emerging market currencies in and outside Asia move with the renminbi in each phase. Their co-movement peaked during the basket management phase with its more multilateral fixings. Then, after May 2017, co-movement dropped in the countercyclical phase when yesterday's dollar moves had no effect on today's fixing.
In sum, a renminbi that responds more to market moves seems to make other currencies co-move more with it. It enlarges the renminbi zone of economies with currencies that share most of the currency's moves against the dollar. It is too soon to tell whether this link will develop into a stable renminbi zone (or "bloc"). The link has implications also for prospects for wider global use of the renminbi.
This study investigates how variation in the determinants of the renminbi's daily fixing since the August 2015 exchange rate reform maps on to variation in the co- movement of the renminbi with regional and other emerging market currencies. We first identify three post-reform periods of RMB management: transition, basket management and countercyclical management. The co-movement with regional and Latin American currencies peaked in the basket period, when the daily fixing was most predictable and multilateral. By contrast, the decline in co-movement in the countercyclical management period between May and July 2017 leaves it premature to speak of a renminbi zone. The dependence of the co-movements on renminbi management has important implications for renminbi internationalisation.
JEL classification: F31, F33
Keywords: exchange-rate determination; renminbi (CNY) policy, renminbi zone, spillovers, renminbi internationalisation
Read the full paper at: https://www.bis.org/publ/work727.htm