A Research On Exchange Rate And RMB Internationalization

Under the background of the historical opportunities created by the US subprime mortgage crisis and the European sovereign debt crisis,combined with the China government’s strategic deployment,strong support of macroeconomics,and strong demand from market players,the internationalization of RMB was officially launched in July 2009 and has been rapidly promoted.RMB has so far become the fifth largest payment currency,the second largest trade financing currency,and the sixth largest currency in foreign exchange transactions around the world.It was formally included into the International Monetary Fund’s Special Drawing Rights(SDR)currency basket on October 1,2016,becoming an important component of the current international monetary system.However,we have noticed that since the reform on formation mechanism of the RMB central parity on August 11,2015,the RMB has rapidly depreciated,its exchange rate has become more fluctuated,and the internationalization of the RMB has stagnated and even regressed.In this context,some researchers believe that the devaluation of the RMB was a de facto reason of dragging down the internationalization of RMB.In this paper,the author takes an attempt to systematically explore the real relationship between exchange rate factors and currency internationalization as well as the internationalization of the RMB.This paper targets to seek truth from facts,guide practice,and try to explore a more effective path for RMB internationalization,given a global macroeconomic environment where the uncertainty in exchange rate movements is rising.This article starts with a summary of the existing literature,draws on some good theoretical and empirical analysis methods,and tries to dig out the actual impact of exchange rate factors on currency internationalization and RMB internationalization theoretically and empirically.The main ideas and contents are as follows:Firstly,this article tries to establish a theoretical model of international currency selection(ie,currency internationalization),and use mathematical modeling analysis to derive the impact of exchange rate factors on currency internationalization.Drawing on Markowitz’s portfolio theory and its mean-variance analysis method,the currency internationalization is regarded as an approximation of how a country’s investors conduct allocation and selection among assets in different currencies(including local currency).An Investor’s Utility Function,a linear expression that is positively correlated with the expected return and negatively related to the risk(variance),is established to maximize the utility of investment allocation between local currency and foreign currency assets given a definite wealth constraint.The exchange rate,which is an important factor when converting foreign currency asset’s return into local currency for comparison,is introduced into the model.The results of model derivation indicate that the relationship between the share of a currency being allocated and its exchange rate change is uncertain.It relates to the parameter in the economic structure,the yield change of foreign currency and local currency assets,the correlation between the fluctuation on of different foreign currency asset and the situation of foreign exchange asset allocation.Secondly,further to the theoretical model,this paper continues to do empirical test.In this part,the author starts with a descriptive statistical analysis by using historical data of the euro and the US dollar and demonstrates that there is no clear positive or negative correlation between the appreciation or deppreciation of a curreny and the increase or decrease of its share in internation reserve,and then utilizes the 1973-2016 panel data of international currencies,such as US dollar,yen,pound sterling and euro,introduce the factors mentioned in the existing literature as control variables,and apply empirical analysis methods such as pooled regression,panel regression(fixed effects and dynamic panels)to examine the impact of exchange rate factors(nominal exchange rate and exchange rate volatility)on currency internationalization.The conclusions of different regression models are basically the same: in the model where the variable of monetary inertia is absent,the relative depreciation of one currency is not conducive to its increase in the share of international foreign exchange reserves while the impact of exchange rate volatility on currency internationalization is not robust enough.Its significance and coefficient are easily affected by different measures of exchange rate volatility and the increase or decrease of control variables.In the context of the inclusion of currency inertia,currency inertia plays a decisive,significant,robust and positive impact on the internationalization of currency,while the effects of nominal exchange rate and exchange rate fluctuation factors on currency internationalization are not significant and the direction is not clear.It is susceptible to the effects of different time intervals,increase or decrease of control variables,and different exchange rate volatility measures.These conclusions are consistent with the results of theoretical modeling.Thirdly,the research turns to the study of RMB internationalization.Based on a comprehensive review of the development history,policy evolution,and current status of RMB internationalization,this paper uses the RMB globalization index of Standard Chartered Bank to measure the level of RMB internationalization,and further applies the monthly data(August 2011 to December 2017)to empirically study the impact of exchange rate factors such as the CNY spot exchange rate,the differences between CNY and CNH,and RMB exchange rate expectation on the internationalization of the RMB.The results of the impulse response function under the VAR and SVAR models show that the depreciation of the RMB against the US dollar,the weakness of CNH compared to CNY,and the depreciation expectation on the RMB against the US dollar have a negative impact on the internationalization of the RMB in the short term,but in the long term this effect will gradually disappear and tend to be neutral.However,the cointegration test and vector error correction model(VECM)examations show that there is a stable cointegration relationship between RMB internationalization and exchange rate factors in the long-term.The depreciation of the RMB against the US dollar,the weakness of CNH compared to CNY,and the depreciation expectation on the RMB against the US dollar are somehow conducive to the internationalization of the RMB.Therefore,there is no simple positive or negative correlation between the RMB exchange rates and the internationalization of the RMB,and its symbol is related to the period and will also be affected by whether it is in or out of equilibrium.Finally,this paper concludes that the causes to the stagnation or retreat of the pace of RMB internationalization in recent years are not the exchange rate changes but the series of capital control measures taken by the authorities to stabilize the exchange rate and the bottleneck of the current RMB internationalization approach which is ―net outflows of current account items + net inflows of capital and financial account items‖.This paper advocates a shift to a new path of ―net outflows of industrial capital,net inflows of current account items,net inflows of financial assets and offshore RMB deposits‖,analyses the necessity and feasibility of the new path,and raises some related policy suggestions.