Is there really a renminbi bloc in Asia?: A modified Frankel–Wei approach

This paper examines whether the renminbi (RMB) has supplanted the US dollar as the major anchor currency in the implicit currency baskets of East Asian economies. First, we demonstrate that existing techniques to address the problem of severe multicollinearity in estimations of the Frankel–Wei regression model, with the movements in both the US dollar and the RMB included on the right-hand side of the equation, remain limited in providing stable and robust results. We then propose a simple modification of the Frankel–Wei regression model to estimate the RMB weight in an economy's implicit currency basket. We show that this new method yields results that are superior to those obtained by existing techniques. Using the new method, we find that the US dollar continues to be the dominant anchor currency and that there is not yet an RMB bloc in East Asia, contrary to claims made by some recent studies. The RMB has taken on some importance in the implicit currency baskets of several East Asian economies in recent years and this appears to have occurred at the expense of the yen. In short, despite the rising importance of the RMB, it has not eclipsed the US dollar as the dominant anchor currency in East Asia. These conclusions are robust to alternative specifications of the modified Frankel–Wei regression model and the use of a structural break estimation technique.