Emerging influence of the RMB on currency markets in a transpiring tri‐polar international monetary system

Abstract

The up-and-coming influence of the RMB on currency co-movements is examined in this paper, in the context of a transpiring tri-polar international monetary system advocated in prior studies. The study is empirically conducted against the backdrop of a more variable RMB exchange rate regime, which enables the integration of the RMB into the international monetary system. The influence of the RMB is found most evident in Asia, being modest in Latin America while reaching Africa. The RMB co-moves most with the currencies of countries that have large shares in trade with China considerably. Meanwhile, a residual-based instrumental variables model is proposed in this study purposely for dealing with issues of common factor dominance, which prevails in currency co-movements. The emerging influence of the RMB on currency comovements arises at the time when a multiple-reserve currency system is coming, and the RMB is included as the third largest currency in the SDR basket. It is shored up by the improved infrastructure, strengthened central bank cooperation and expanded networks for cross-border RMB payments and settlements. It is concluded that the RMB has increasingly integrated into the international monetary system as one of the major players, effecting currency market movements actively alongside the US dollar and euro.