Examining the Interdependence between the Exchange Rates of China and ASEAN Countries: A Canonical Vine Copula Approach

Liu Liu,Sriboonchitta Sriboonchitta,Wang Wang

doi:10.3390/su11195487

Abstract

Based on the canonical vine (C-vine) copula approach, this paper examines the interdependence between the exchange rates of the Chinese Yuan (CNY) and the currencies of major Association of Southeast Asian Nations (ASEAN) countries. The differences in the dependence structure and degree between currencies before and after the Belt and Road (B&R) Initiative were compared in order to investigate the changing role of the Renminbi (RMB) in the ASEAN foreign exchange markets. The results indicate a positive dependence between the exchange rate returns of CNY and the currencies of ASEAN countries and show the rising power of RMB in the regional currency markets after the B&R Initiative was launched. Besides this, the Malaysian Ringgit proved to be most relevant to the other ASEAN currencies, thus playing an important role in the stability of regional financial markets. Moreover, evidence of tail dependence was found in the returns of three currency pairs after the B&R Initiative, which implies the presence of asymmetric dependence between exchange rates. The results from time-varying C-vine copulas further confirmed the robustness of the results from the static C-vine copulas.

Highlights

Since the Belt and Road (B&R) Initiative was proposed by China’s President Xi Jinping in 2013, China has expanded its “circle of friends” in the B&R region with fruitful achievements in economic cooperation
It is noteworthy that compared with the Pre-B&R period, the values of Kendall’s tau in the first canonical vine (C-vine) tree all increased obviously in the Post-B&R period, which indicates that the degree of dependence between Chinese Yuan (CNY) and the currencies of Association of Southeast Asian Nations (ASEAN) countries increased obviously after the B&R Initiative began
Given the increasing opportunities for financial cooperation between China and the ASEAN, recognizing the interdependence among exchange rates is crucial for both parties in order to avoid potential systematic risks in the regional currency markets and to stabilize domestic financial markets

Summary

Introduction

Since the Belt and Road (B&R) Initiative was proposed by China’s President Xi Jinping in 2013, China has expanded its “circle of friends” in the B&R region with fruitful achievements in economic cooperation. These deepening ties have intensified the interdependence of financial markets between China and B&R countries, and the currency market is no exception. According to the statistics of the trade volume between China and its 59 trading partners along the Belt and Road (source: Wind Economic Database), during the period from January 1995 to June 2018, six of the top ten largest trade partners of China in the Belt and Road area were ASEAN countries. Exploring the different dependence characteristics between the exchange rates of CNY and ASEAN currencies before and after the B&R Initiative helps us to understand the changing role of RMB in the regional currency markets, providing a useful reference to guide regional cooperation in a more sustainable, inclusive, and universally beneficial direction

Methods

Results

Conclusion