Systemic Importance Of RMB's Exchange Rates

As President Xi pointed out "the world is undergoing the most profound and unprecedented changes in a century",the international monetary system is indeed undergoing tremendous changes with the US dollar and the Euro being weakened by the subprime mortgage crisis and the European debt crisis.In contrast to the declining portion of the US dollar and Euro as international reserve and payment currency,the proportion of the Renminbi(RMB),the Chinese currency,is climbing.Besides,the changes in RMB's exchange rate has attracted considerable attention around the world.The currency exchange rate is a comprehensive price signal and a mechanism for the international division of labor and resource allocation globally.However,the existing research mainly evaluates the internationalization of RMB's by its international use instead of the importance of RMB's exchange rate in the international monetary system.Therefore,this research refers to the research paradigm of systemically important financial institutions to study the systemic importance of RMB's exchange rate,which refers to the key role of RMB's exchange rate in the international currency and financial system through its correlation with the exchange rates of other currencies and prices of other assets.The research enriches the literature on RMB internationalization and reflects the undergoing changes in the international monetary system.On one hand,this paper evaluates the systemic importance of the RMB's exchange rate in the international currency system as a currency anchor.As China has established close trade and financial ties with other countries,the change of the RMB exchange rate can drive the exchange rate of other currencies,and thus systemically affects the whole currency system.Based on the improvement of the anchor currency model,this paper estimates the spillover networks of exchange rates,which measures the strength and direction of spillover for each currency.This paper further calculates the RMB impact index base on the spillover networks,which represents RMB's systemic importance as an anchor currency.The results show that RMB exchange rate has become increasingly important in the spillover network because the structure of spillover network is affected by the direct and indirect connections between countries through trade networks and financial networks:direct trade and financial connections will strengthen spillovers between currencies in the purpose of alleviating exchange risk;the currency spillover between countries with similar capital inflow structures is stronger,confirming the"common lender" effect;the currency spillover between countries with similar export structures is stronger,confirming the "export competition" effect.More detailed investigation shows that the attractiveness of RMB assets can enhance the impact of the RMB on the currencies of developed economies,and China's investment in developing countries can significantly promote the impact of the RMB on the currencies of developing countries.This provides empirical support for improving China's investment in the Belt and Road.Further study shows that the rising importance of RMB in the Belt and Road can be mainly attributed to the Belt and Road initiative and the currency cooperation between China and countries in the area.On the other hand,this research examines RMB's systemic importance in the international financial market as a safe-haven currency by evaluating its hedging effectiveness in the face of financial stress using co-skewness and co-kurtosis of RMB's premium with respect to the premium of a global equity index.The examination involves the three international major markets,including international equity,bonds,and foreign exchange markets,and thus can evaluate RMB's systemic importance in the international financial system.Results show that RMB co-skewness(covariance between RMB premium and equity volatility)is mostly negative,implying that RMB is not a good hedge in the volatile market.Moreover,positive RMB co-kurtosis(covariance between RMB premium and equity skewness)implies that RMB is unable to hedge against the stock market crash.Neither RMB co-skewness nor co-kurtosis is priced,suggesting investors with skewness and kurtosis preferences would not use RMB to hedge against financial stress.Therefore,RMB is not yet a safe-haven currency.In general,the RMB exchange rate has become considerably important in the international currency system,but its importance is still limited in the entire international financial system.In the background of "undergoing century changes",as China strengthens mutual economic and trade cooperation with other countries,gradually opens up its financial markets,and deepen market-oriented interest rate reforms,it is foreseeable that the RMB exchange rate will play an increasingly important role in the international monetary system.