Abstract
As the world’s largest exporter and second-largest importer, China has made exchange rate stability a top priority for its economic growth. With development over decades, however, China now holds excess dollar reserves that have suffered a huge paper loss because of quantitative easing in the United States. In this reality, China has been provoked into speeding RMB internationalization as a strategy to reduce the cost and get rid of the excessive dependence on the US dollar. Thus, this study attempts to investigate the volatility contagion effect and dynamic conditional correlation among four assets, namely China’s onshore exchange rate (CNY), China’s offshore exchange rate (CNH), China’s foreign exchange reserves (FER), and RMB internationalization level (RGI). Considering the huge changes before and after China’s “8.11” exchange rate reform in 2015, we separate the period of study into two sub-periods. The Diagonal BEKK-GARCH model is employed for this analysis. The results exhibit large GARCH effects and relatively low ARCH effects among all periods and evidence that, before August 2015, there was a weak contagion effect among them. However, after September 2015, the model validates a strengthened volatility contagion within CNY and CNH, CNY and RGI, and CNH and RGI. However, the contagion effect is weakened between FER and CNY, FER and CNH, and FER and RGI.
Highlights
In the last two decades, China’s gross domestic product (GDP) has been increasing year by year, from 1.34 trillion US dollars in 2001 to 15.42 trillion US dollars in 2020, and currently ranks as the second largest in the world by nominal GDP and the largest in the world by purchasing power parity
This study aims to fill this gap in the literature, to examine the dynamic correlation and volatility contagion effect of exchange rate volatility concerning currency internationalization under foreign exchange reserve interference in China
As used to to measure measure the the transmission of volatility from shocks arising in one country to other countries, and from transmission of volatility from shocks arising in one country to other countries, and from the finance financeperspective, perspective,can canexplain explain how shock of one can be transferred to the how thethe shock of one assetasset can be transferred to other other assets
Summary
In the last two decades, China’s gross domestic product (GDP) has been increasing year by year, from 1.34 trillion US dollars in 2001 to 15.42 trillion US dollars in 2020, and currently ranks as the second largest in the world by nominal GDP and the largest in the world by purchasing power parity. The main source of China’s economic growth is the net trade of import and export. The share fluctuates, the ratio has remained above 35%. As the world’s largest exporter and second-largest importer, China still needs to use the US dollar and other international currencies when it participates in international trade, overseas investment, or debt. The large fluctuation of the benchmark exchange rate based on the RMB against the US dollar will bring great risks to the domestic economy. China has made exchange rate policy a top priority for its economic development.
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