Is the Renminbi Asia's Dominant Reference Currency? A Reconsideration

Recent empirical studies show that the Chinese currency renminbi is either becoming or has become a dominant reference currency in Asia. However, the high correlation between the US dollar and renminbi movements hampers the identification of their individual effects on the Asian currencies. In particular, the application of Frankel–Wei regressions to determine the weights of the US dollar and the (unorthogonalized) renminbi in the implicit currency baskets could suffer from endogeneity problems that produce an upward bias in renminbi's estimated weight. This paper reviews the evidence by applying country-specific Vector Autoregression (VAR) models to daily exchange rate data from nine Asian economies namely, Hong Kong, Indonesia, India, Korea, Malaysia, the Philippines, Singapore, Thailand, and Taiwan. The VAR methodology allows for mutual interaction of the exchange rate variables, thereby circumventing the simultaneity bias problem. To overcome the identification problem, we study the relationship between Asian currencies and the US dollar (renminbi) in terms of their bilateral rates against the renminbi (US dollar). All bilateral exchange rates are standardized so that the impulse responses generated are in terms of the number of standard deviations of each series, hence facilitating comparisons across the two sets of models. Generalized impulse response analysis reveals that the US dollar has a significant influence on Asian currencies before the global financial crisis but its impact has weakened post-crisis. By contrast, there is clear evidence that the role of the renminbi in Asian exchange rate determination has increased after the global financial crisis, exerting either greater or a similar impact as the US dollar. Nonetheless, our findings do not support the claim that ade facto"renminbi bloc" has emerged in the region.