Renminbi Appreciation Research Articles

Dynamic impacts of multidimensional uncertainty on the renminbi exchange rate: Insights from time-varying analysis

Using a time-varying model, this study investigates the dynamic impact of multidimensional uncertainty by considering data from the policy, finance, and energy markets on the renminbi (RMB) exchange rate from 2001 to 2022. It analyzes specific influence patterns during critical economic periods. We find that multiple dimensions of uncertainty influence the RMB exchange rate rapidly and that these influences exhibit notable temporal variation. (1) The dynamic impact of economic policy uncertainty (EPU) on the RMB exchange rate depends not only on the magnitude of EPU but also on the divergence between domestic and global EPU (also called relative uncertainty). When the domestic EPU is lower than its global counterpart, it can still promote RMB appreciation, even at high levels. (2) The dynamic effect of stock market uncertainty depends on the balance between asset substitutability and risk contagion. The dominance of asset substitutability triggers RMB appreciation during periods of stock market uncertainty. (3) The escalation of energy market uncertainty significantly increases the value of the RMB; this effect is especially pronounced after the financial crisis. Against the backdrop of heightened global economic uncertainty and the significant challenge of maintaining exchange rate stability, regulators should focus on the impact of relative uncertainty and prevent excessive spillovers from other markets. Fostering a risk-neutral mindset and effectively leveraging uncertainty is crucial for forming stable market expectations for exchange rates.

Renminbi Appreciation and China's Industrial Upgrading

AbstractTo identify the macroeconomic environment that has enabled China's industrial upgrading during a period of persistent renminbi appreciation, we construct a two‐country New Keynesian model of industrial upgrading with a global production network, endogenous firm entry, and a directed quality frontier. We show that renminbi appreciation promotes industrial upgrading without hurting real economic growth in the longer run. This holds true especially through four channels. First, the quality threshold for firm entry is lower to allow for more firms participation and thus greater product varieties (quality threshold channel). Second, upstream skill‐based production uses more imported inputs of higher quality (imported input channel). Third, there is substantial global demand towards the exports of high‐quality inputs (global demand channel). Fourth, domestic inputs are competing against imported inputs to broaden the scope for competition in the upstream product market to incentivize quality upgrading (scope for competition channel).

Renminbi (RMB) Appreciation: Discussion and Analysis on China’s Trade Balance, Import and Export from 2005 to 2019

The modern mainstream in economic globalization and integration suggests that trade cooperation is being a trend that forges foreign trade generally contributes as a vital driving force to the national economic development. In particular, changes in the exchange rate due to either market forces or monetary policies have been viewed as a direct effect on a country’s trade balance, industrial development, and macroeconomic growth. Since China acceded to the World Trade Organization (WTO), its economic openness has been further enhanced, and the total foreign trade volume has multiplied. However, the Renminbi (RMB) exchange rate lately has received widespread attention. This paper examines and discusses the impact, if any, of exchange rate changes under currency appreciation on China’s trade balance from 2005 to 2019. For the selection of necessary variables related to trade balance, we use a set of independent variables including income, RMB exchange rate, and FDI to research the correlation between those variables by using the co-integration testing method and impulse response function. The empirical testing results suggest that RMB appreciation could affect China’s trade balance, though not significantly, and most likely reduce the trade surplus. The appreciation in RMB also creates a favorable environment for domestic enterprises to trade. Further, the Chinese government should take appropriate measures to respond to the impact of RMB appreciation on China’s exports.

Exchange rate appreciation and outward FDI in China

This study analysed the impact of appreciation of the renminbi (RMB) on China's outward foreign direct investment (OFDI) on a theoretical and empirical basis. Based on theoretical analysis, we found that the appreciation of RMB can promote OFDI, as it can lower the threshold for foreign direct investment. Then, by constructing export-weighted effective exchange rates, we found that for every 1% appreciation of the RMB, the probability of enterprises engaging in OFDI increased by 0.0069 over 2001–2012.

Impact of uncertainty on foreign exchange market stability: based on the LT-TVP-VAR model

PurposeThe purpose of this study is to investigate the effects of uncertainty, namely, macroeconomic uncertainty (MU) and financial uncertainty (FU) on foreign exchange market stability, specifically on foreign exchange market pressure (EMP) and jump risk (RJV).Design/methodology/approachThe latent threshold time-varying parameter VAR (LT-TVP-VAR) econometric approach is used in estimations to solve structural breaks.FindingsThe relationship of uncertainties and China's foreign exchange market stability is latent threshold nonlinear dynamic time-varying. In China's renminbi (RMB) appreciation stage, both MU and FU weaken the appreciation pressure of RMB. Moreover, MU and FU significantly increase the RJV, while MU significantly affects the RJV of the foreign exchange market. In the RMB depreciation stage, both MU and FU strengthen the EMP.Research limitations/implicationsFindings based on data in China's foreign exchange market can be considered for other global markets in future research.Practical implicationsAn increase in MU and FU has a negative effect on foreign exchange stability. Regulators can prevent the economic system uncertainty shocks on foreign exchange market stability through observation and judgment of MU and FU, which helps prevent and relieve financial risks. Investors can reduce foreign exchange risk as the exchange rate rebounds after hedging behavior during high uncertainty periods.Originality/valueThe effect of MU on the foreign exchange market stability is greater than that of FU, regardless of whether EMP or RJV occurs in the foreign exchange market.

Exchange Rate Undervaluation and Growth in China

The widely held belief that China’s undervalued exchange rate has been crucial to its rapid industrialization and economic growth over the last four decades is critically qualified and nuanced. In any case, renminbi (RMB) appreciation, rising wages with exhaustion of its labour surplus, growing domestic demand and slowing international trade and growth following the 2008 global financial crisis have reduced China’s economic growth.

Asymmetry of Exchange Rate Pass-through in China's Coastal Regions

Xie, B., 2019. Asymmetry of exchange rate pass-through in China's coastal regions. In: Li, L.; Wan, X.; and Huang, X. (eds.), Recent Developments in Practices and Research on Coastal Regions: Transportation, Environment and Economy. Journal of Coastal Research, Special Issue No. 98, pp. 433–437. Coconut Creek (Florida), ISSN 0749-0208.In the article, the asymmetry of the renminbi (RMB) exchange rate pass-through on the price level in China's coastal areas was investigated. The results showed that the extent of RMB exchange rate pass-through is incomplete. Concerning the asymmetry of the exchange rate pass-through under conditions of RMB appreciation and depreciation alone or the combination with different fluctuation scopes in exchange rate, it was concluded that, when RMB depreciated, the exchange rate pass-through effect was greater by comparison with RMB appreciation. At the same time, the extent of the exchange rate pass-through was more significant as the exchange rate changed sharply; otherwise, no transfer effect was generated.

Asymmetric effect of China’s exchange rates on global commodity prices: New evidence and implication

ABSTRACTIn the context of the ongoing trade dispute between China and the United States, our study attempts to investigate the sensitivity of global commodity prices to the appreciation and depreciation of renminbi (RMB). Using quarterly data of 1994–2016, we reach three notable findings based on linear and non-linear specifications of autoregressive distributed lag (ARDL) model. First, the global price for selected agricultural commodities is sensitive to the appreciation of RMB, exercising downward pressure on agricultural commodity markets. Second, the global price for crude oil is found to react negatively to real appreciation of RMB. Third, the global price for selected metal commodities is found to respond negatively to changes in RMB. Based on these findings, we suggest China adopts a one-off appreciation instead of tariffs on imported commodities to prevent the fluctuation of commodity prices and realize the self-sufficiency goal.

Structural Changes in the Relationship between Foreign Direct Investments and China’s Housing Price Bubble

Since 2006, China has issued a series of policies to regulate foreign investments (FI) in the attempt to control housing prices. In the present study, the association between foreign direct investments (FDI) and China’s housing price bubble (HPB) was examined to elucidate the rationality of foreign investment controls. Structural changes in the influence of FDI on China’s HPB were observed. FDI and China’s HPB exhibited an increased association between 1985 and 2015, particularly following Q3 of 1997. This may have resulted from the relative stability of the Renminbi during the Asian Financial Crises, which attracted an increased inflow of FDI to China, and consequently aggravated China’s HPB. A threshold regression model was employed to uncover the reasons for the structural changes exhibited in the influence of FDI on China’s HPB. Findings indicated that FDI only influenced China’s HPB during the Renminbi appreciation, and that increased FDI was not correlated to HPB during the Renminbi depreciation or when the value of Renminbi remained unchanged against the U.S. dollar. The empirical results obtained in the present study suggest that the Chinese government should first observe changes in the exchange market prior to controlling the housing market.

Political Environment and Chinese OFDI Under RMB Appreciation: A Panel Data Analysis

ABSTRACTWe examine the role of political environment (PE) in determining Chinese multinational corporations’ (MNCs) investment decisions considering the RenMinBi (RMB) exchange rate (ER) movement. System generalized method of moments, feasible generalized least squares, and fixed effect estimations are employed to conduct a panel data analysis of 92 countries for the period of 2003–2015. Our empirical results reveal that Chinese outward foreign direct investment (OFDI) responds negatively to ER risk and political risks individually. After introducing the joint effect of PE and ER movement, the results suggest that Chinese OFDI’s risk preference to PE is reversed when RMB is appreciating. We argue that Chinese firms are still risk-avert when considering investing abroad. The empirical result shed light on better understating of Chinese OFDI patterns and motivations.

The Impact of Institutions and Exchange Rate Volatility on China’s Outward FDI

ABSTRACTOver the past decade, China’s outward foreign direct investment (OFDI) has rapidly increased. However, its characteristics are not sufficiently studied. In this article, we explore the host country’s determinants of China’s OFDI, with a focus on institutional quality, exchange rate volatility, and natural resources by performing an econometric analysis for the period 2003–2013 for a sample of 49 countries. Our results reveal that China’s OFDI is invested in countries with relatively poor institutional quality and abundant natural resources. Exchange rate variability has a dampening effect on China’s OFDI and that the appreciation of the Chinese renminbi enhances OFDI flows.

Determinants of Real Chinese GDP 1978–2014

Abstract In 2014, the IMF reported that China became the largest economy in the world according to Purchasing Power Parity rates. This study aims to explain the Chinese economic miracle. It focuses on frequently suggested factors influencing China’s real gross domestic product (GDP), such as export promotion, exchange rate policy, and foreign direct investment (FDI). The paper employs the Bounds test of the autoregressive distributed lag (ARDL) model to test for cointegration. Once cointegration is established, Granger Causality is investigated using the vector autoregressive model and the Toda and Yamamoto (1995) method. Two different combinations of the real macroeconomic variables exports, exchange rate, imports, and FDI were employed to examine Granger causal relationships. All explanatory variables, except for the exchange rate, were found to have plausible relationships with GDP. The exchange rate and GDP relationship was unexpected; a Renminbi appreciation was associated with an increase in GDP. To investigate this paradox, a third ARDL model was estimated with exports as the dependent variable and the exchange rate, world GDP, and FDI as the independent variables. In this model, we found evidence of cointegration and a plausible relationship between real exports and the real exchange rate. Exchange rate devaluation increased exports and thus indirectly increased GDP. Such findings help to resolve the unexpected results. Nonetheless, according to the Granger causality tests the established statistical evidence is rather weak. We found that both the exchange rate and FDI are no longer strong drivers of economic growth in China.

Can the RMB appreciation effect Ningbo import?

This paper combines the import trade situation of Ningbo under Renminbi appreciation and analyzes the impact of Renminbi appreciation on import of Ningbo. The Renminbi exchange rate to Ningbo import trade have certain effect, namely the appreciation of the Renminbi, imports increased to a certain extent, but some period of change don’t increase, and even appeared down. The appreciation of the Renminbi and the influence of Ningbo import structure relations change is various. The appreciation of the Renminbi to Ningbo import is opportunities and challenges, Then it proposes the policy of the import trade of Ningbo on the problem of RMB appreciation

An empirical analysis of the Renminbi: Exchange rates and cross‐border trade settlement

AbstractWe introduce a gravity model to the currency choice for cross‐border trade settlement and the Heckman selection model to estimate the impact of the exchange rate on the cross‐border trade settlement of the Renminbi (RMB). We analyse bilateral exchange rates using panel data of China and 182 RMB settlement countries, or areas, from 2009 to 2014. We find that, regardless the choice stage or scale stage of RMB cross‐border trade settlement, the appreciation of the RMB does not necessarily promote RMB cross‐border trade settlement. This result holds when we take geographic differences into account and split the settlement of cross‐border trade into merchandise and service trade. We further investigate the channels through which exchange rate influences the cross‐border trade settlement of RMB, and we find that the appreciation of RMB impedes enterprises from choosing RMB as their settlement currency by reducing the scale of export to RMB settlement areas, whereas it speeds up RMB cross‐border trade settlement by increasing the scale of China's import from RMB settlement areas. We find that China's economic strength supports the development of RMB cross‐border trade settlement. However, the geographical distance between China and the RMB settlement areas may inhibit cross‐border trade settlement in RMB.

Export tightening, competition, and firm innovation: Evidence from the renminbi appreciation

AbstractThis paper investigates how firm innovation reacts to changes in competitive pressure in the export market. We use the exchange rate appreciation of the renminbi during 2005–2007 as a natural experiment and exploit its differential impact on Chinese manufacturing firms with different export exposure. The appreciation reduced exports and imposed greater competitive pressure on exporters relative to non‐exporters. In response, exporters increased innovation activities more than non‐exporters. Using a difference‐in‐difference approach, we find that the research and development expenditure of exporters increased by 11% more than that of non‐exporters during the appreciation period, and the new product development of exporters increased by nearly 1.5 times more than that of non‐exporters. These results highlight the important role of competition in providing incentives for firm innovation.

Comment on “The Boom and Bust of the RMB's Internationalization: A Perspective from Cross‐Border Arbitrage”

Zhang and Zhang (2017) assess the achievements and prospects of the Renminbi (RMB) internationalization. Their paper focuses on analyzing the role of cross-border arbitraging activities in the RMB's internationalization measured by cross-border RMB settlements in trade and investment and RMB deposits in the offshore market. They explain how the RMB internationalization was pushed forward from 2010 to 2015H1, and slowed down afterwards. Meanwhile, the role that cross-border arbitraging activities played during this cycle was critically highlighted. Zhang and Zhang provide many interesting observations. I have a number of comments regarding their main arguments and methodologies. Cross-border arbitraging activities must have played a critical role in expanding cross-border RMB settlements in trade and investment and RMB deposits in the offshore market from 2010 to 2015H1. However, Zhang and Zhang have not yet presented a clear assessment of the extent to which cross-border arbitraging activities, relative to other factors such as China's trade and output growth and capital account liberalization, have contributed to the RMB internationalization. They suggest that “cross-border arbitrage could only partly explain the fast development of RMB internationalization, and the rest of the fast development would be driven by the genuine increase in the demand for RMB assets by foreigners and for trade and investment settlement.” A formal test based on an econometric technique could be used to estimate the degree of the contribution that cross-border arbitraging activities made to the expansion of the cross-border RMB settlements and RMB deposits in offshore markets. Related to this point, changes in China's overall exports and imports, in addition to cross-border arbitrage flows, must be a major cause of changes in the RMB's usage in trade settlements. As pointed out by Zhang and Zhang, an expectation of a RMB appreciation (depreciation) and the onshore-offshore interest rate spread influenced the cross-border arbitrage flows in RMB settlements in trade and investment as well as RMB deposits. Zhang and Zhang's Figure 5 also provides evidence that the exchange rate spread between the onshore (CNY) and the offshore (CNH) markets was positively related to the ratio of RMB payments in imports to exports. The widening of the spread induces more cross-border arbitrages: if there is an expectation of a RMB appreciation (depreciation), more RMB payments would take place on the import (export) side. However, it should be noted that the ratio of RMB payments in imports to exports must be also related to the relative change in total exports and imports. Concerning the “bust of RMB internationalization” since 2015H2, Zhang and Zhang focus on analyzing the impact of the new exchange rate regime, and subsequent changes in exchange rates and interest rate arbitrage activities. As they have discussed, China shifted its exchange rate regime on 11 August 2015 towards a more flexible, market-determined system. This new policy had to do with balancing capital outflows and supporting export competitiveness amid a weakening growth environment and an overvalued currency. Increasing exchange rate flexibility also strengthened China's efforts to add the Renminbi to the International Monetary Fund's (IMF's) Special Drawing Rights (SDR) basket. Right after the new policy was implemented, the value of the RMB depreciated significantly in the following weeks, sending shockwaves through global financial markets, and then stabilized largely due to stronger foreign exchange intervention by the People's Bank of China (PBOC). However, since then a prolonged fall in the currency's value and net capital outflows has occurred despite the government's interventions. Zhang and Zhang claim that several factors including an increasing in expectation of a RMB depreciation, a decline of the onshore-offshore interest rate spread, a rise in domestic systemic financial risks, stronger capital account controls, and the PBOC's interventions in the offshore market, weakened cross-border arbitraging activities, causing the “bust of RMB internationalization.” A more explicit investigation of the independent effect of each of these factors on the change in the flows in RMB-denominated trade and capital flows during the “bust” period would be useful to assess the future prospects of the RMB internationalization. Given China's continuous economic growth and greater global influence, the RMB will likely emerge as a new international currency (Lee, 2014). However, this is contingent on achieving high capital account convertibility and developing a more efficient financial system. Zhang and Zhang suggest that to pursue a more sustainable RMB internationalization, the Chinese government should maintain robust economic growth, avoid a financial crisis, liberalize the capital account in a gradual and cautious way, accelerate domestic financial reform, and integrate the RMB internationalization with Asian monetary cooperation. Additionally, it is recommended to set the priorities and adequate sequencing among these objectives. For instance, the government can carry out domestic financial reforms more actively, followed by a gradual capital-account liberalization and RMB internationalization.

Time-dependent lead-lag relationship between the onshore and offshore Renminbi exchange rates

We employ the thermal optimal path method to explore both the long-term and short-term interaction patterns between the onshore CNY and offshore CNH exchange rates (2012–2015). For the daily data, the CNY and CNH exchange rates show a weak alternate lead-lag structure in most of the time periods. When CNY and CNH display a large disparity, the lead-lag relationship is uncertain and depends on the prevailing market factors. The minute-scale interaction pattern between the CNY and CNH exchange rates change over time according to different market situations. We find that US dollar appreciation is associated with a lead-lag relationship running from offshore to onshore, while a (contrarian) Renminbi appreciation is associated with a lead-lag relationship running from onshore to offshore. These results are robust with respect to different sub-sample analyses and variations of the key smoothing parameter of the TOP method.

Impact of Renminbi Appreciation on China’s Trade Balance: From Empirical Evidence

By estimating trade balance equation, export equation and import equation, this paper shows empirically that China’s trade surplus is not sensitive to the fluctuations in the real effective exchange rate, but the price elasticity has become large and significant in the period from 2005 onwards after the new exchange rate regime was instituted on 21 July, 2005. In the latter case, I found divergent results on ordinary trade and processing trade, i.e. the appreciation in Renminbi has found to reduce ordinary trade balance and increase processing trade balance. In addition, I found the appreciation has larger impact on processing trade (both the processing exports and the processing imports) than it has on ordinary trade.

The implications of monetary expansion in China for the US dollar

We examine the influence of rapid growth in China's money supply on the US dollar within a framework of monetary models of exchange rates. We develop out-of-sample forecasts of the US dollar exchange rate using US and global data on price level, output, and interest rates, and money supply data for the US, China, and the rest of the world for the period 1996–2013. Monetary model forecasts significantly outperform a random walk forecast in terms of mean squared forecast error in the long run. A monetary error correction model with sticky prices performs best. Rolling sample analysis indicates changes over time in the influence of Chinese money supply in forecasting the US dollar. The expectation is that rapid money growth in China would increase the demand for dollars thus raising the value of the dollar, yet our forecasts are to the contrary for the mid 2000s. This is consistent with anticipation of renminbi appreciation under China’s managed exchange rate, which made holding renminbi more attractive. With the break from a dollar peg in 2005 and subsequent currency appreciation, the distortion was alleviated and the forecast direction for the dollar became as expected.

Exchange rate and Chinese outward FDI

ABSTRACTDid the exchange rate (ER) regime change that was announced by the Chinese government in 2005 lead to an increased sensitivity of Chinese multinational companies (MNCs) to ER fluctuations? To answer this question our article considers the effect of ER level, volatility and expectation on the Chinese outward foreign direct investment (OFDI) activities in 119 countries for a period of 2003–2013. We find striking evidence that Chinese Renminbi appreciation has a negative impact on Chinese outward FDI flows, and both higher ER volatility and expected depreciation encourage Chinese outward FDI flows. We introduce two complementary effects that explain these findings: repatriation effect and mercantilist effect. In view of the recent debate about the growing importance of Chinese Renminbi in the international transactions we believe that our research results shed light on the possible impact of ER policies on Chinese MNCs behaviour and global FDI distribution.