Do China's policy measures for RMB internationalization foster currency co-movements?

Abstract

This paper examines the factors driving the co-movement between the renminbi (RMB) and other currencies, with a particular focus on the impact of China's institutional arrangements on RMB co-movements. Using panel data covering 32 countries from 2005 to 2020, the study finds that, among the institutional arrangements, clearing banks and direct trading strengthen the RMB's influence on bilateral exchange rates, while currency swaps weaken it. These institutional arrangements play a role in amplifying the impact of economic linkages on RMB weights. Currency swaps can enhance the RMB's weight through trade linkages, while clearing banks and direct trading create amplifying effects through financial linkages. Overall, China's institutional arrangements contribute significantly to greater RMB co-movements through both a direct effect and an amplifying effect.