EFFECTS OF RMB INTERNATIONALISATION ON MAJOR WORLD CURRENCIES

Abstract

With recent buzz surrounding the rise of the RMB as the world’s next international currency, there have been concerns over the potential ramifications of RMB Internationalisation on other major world economies and their currencies. The paper provides insights on this stirring issue, by examining such effects from both qualitative and quantitative perspectives. Firstly, I commence the study with a discussion of international currencies and recent attempts by China to propel its currency convertibility progress. Then, I investigate the impacts of RMB Internationalisation on eight major world currencies: USD, EUR, JPY, AUD, CAD, GBP, DKK, SGD, with two delineated event types: China-induced exchange rate reform events, and Country-specific capital account liberalisation events. Empirical test findings revealed limited observable event impacts, with the exception of the AUD, as other currencies appeared to be affected by external market factors. Results from the structural break test revealed that the AUD, EUR and DKK had pre-shift economic relationships with the CNY. When the shift was introduced, a range of effects was observed. By analysing results from significant shifts, findings showed that China-induced events, though small in effect size, amplified Australia’s trade dependence on AUD/CNY shocks, and vice versa, and resulted in trade-off problems for the EU and Denmark. An indirect shift was also observed for the US capital account. Country-specific event results revealed a downward adjustment effect for AUD/CNY-current account shocks, and indicated the susceptibility of Denmark and the US to external RMB Internationalisation events. Then, I consider implications of findings on major world economies and currencies. Lastly, I discuss existing obstacles to China’s RMB Internationalisation progress and provide concluding remarks on the potential future directions of the RMB.