Dancing with dragon: The RMB and developing economies’ currencies

Abstract

We analyse Chinese RMB co-movements with the currencies of other developing economies using daily data from January 1, 2006 to December 31, 2020. We find that the RMB plays an important role in East Asia & Pacific. Bilateral trade significantly increases the probability of RMB co-movements with other currencies while inflation differential decreases it. Additionally, the currencies of the economies that are more inclined to adopt a pegging system are less likely to co-move with the RMB. We further divide the sample into three sub-periods based on two major China’s currency reforms and the results are consistent with our main finding. We also investigate the nonlinear determinants of RMB co-movements in high and low volatility regimes, respectively, and show the different patterns. Last but not least, we find that RMB currency swap and the Belt and Road Initiative amplify RMB co-movements in larger and more developed economies.