The Rise and Rise of the Renminbi: An Update
Last year, we published a paper, The Renminbi Bloc Is Here: Asia Down, Rest of the World to Go? In it, we documented the striking rise of the renminbi (RMB) since mid-2010. (A good summary of this paper can be found in the Economist magazine or in our Financial Times op-ed.)
We showed that in East Asia, there was already an RMB bloc, because the RMB had become the dominant reference currency, eclipsing the dollar. In this region, 7 currencies (those of all the large countries) out of 10 moved more closely with the RMB than with the dollar; the average value of this co-movement was 40 percent greater for the RMB than for the dollar. While the dollar remained the dominant currency globally, we found that the RMB was gaining ground even beyond Asia.
The 2012 paper used data through July of that year. The obvious question was whether our results remained valid (robust) a year later, with the addition of another 257 observations to the original sample of 527 (i.e., a nearly 50 percent increase in sample size). We have now updated our paper, which has been accepted for publication in the Journal of Globalization and Development (edited by Professors Antonio Ocampo, Dani Rodrik, Joseph Stiglitz, and Shahe Emran).
It turns out that one year later, despite tumult in international financial and currency markets, our results on the rise of the RMB not only hold but are also slightly strengthened. The RMB remains the most dominant currency in Asia; the average value of the co-movement between Asian currencies and the RMB is now 60 percent greater than the comparable co-movement with the dollar (tables 3 and 4 in the two versions highlight the differences).
We find that the rise of the RMB as a reference currency is associated with countries' trade integration with China. 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 China's financial and external sectors could considerably expedite the process.