HOW FAR DOES THE CHINESE RENMINBI MOVE FORWARD TO BEING A WORLD CURRENCY

Abstract

This paper focuses on the examinations of the internationalization of Chinese renminbi (RMB) by using modern econometrics analysis. Our empirical results provide little evidence on the return and volatility spillovers between Chinese RMB and the currencies of developed counties and ASEAN, whereas both spillovers of Taiwanese Dollar (TWD) and Japanese Yen (JPY) perform in an opposite direction. More importantly, the volatility spillover performance of TWD is more stable and return spillover is more convincing when compared to those of JPY. Furthermore, based on the framework of Frankel-Wei model, we illustrate the Chinese RMB has the strong correlations with TWD and USD after the RMB reformation in 1994 until now. In addition, the spillover between RMB and TWD even higher after 2005 in which year Chinese authorizes did the second monetary reformation. These phenomena may indirectly explain (1) the high foreign direct investment (FDI) of China and low FDI of Taiwan after 2005; (2) the potential of TWD being the representative currency of the Greater China Region and (3) how far the Chinese RMB moves forward to being an international currency.