Tuesday, May 3, 2011

Who cares about the Chinese Yuan?

NIPFP Working Paper 89

Vimal Balasubramaniam, Ila Patnaik and Ajay Shah
May 2011


The rise of China in the world economy and in international trade has raised the possibility of a rise of the Yuan as an international currency, particularly after the Chinese authorities have undertaken policy initiatives such as Yuan settlement and Yuan swap lines. In this paper, we measure one dimension of Yuan internationalisation: the role of the Yuan in the exchange rate arrangements of other economies. While the magnitudes are small, our findings show that as many as 34 currencies in the world have been sensitive to movements in the Yuan. This suggests that the Yuan potentially has a significant role to play in global exchange rate arrangements. Contrary to popular belief, however, we find a limited role of the Yuan among Asian economies.