Safehavenness of the Chinese renminbi

• Published date: 01 August 2020
• Author: Tom Pak Wing Fong,Alfred Yun Tong Wong
• Date: 01 August 2020
• DOI: http://doi.org/10.1111/infi.12360

International Finance. 2020;23:215–233. wileyonlinelibrary.com/journal/infi © 2019 John Wiley & Sons Ltd

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DOI: 10.1111/infi.12360

ORIGINAL ARTICLE

Safehavenness of the Chinese renminbi

Tom Pak Wing Fong

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Alfred Yun Tong Wong

Research Department, Hong Kong

Monetary Authority, Hong Kong, China

Correspondence

Tom Pak Wing Fong, 55/F, Hong Kong

Monetary Authority, Two International

Finance Centre, Central, Hong Kong,

China.

Email: tom_pw_fong@hkma.gov.hk

Abstract

This paper investigates how safe (or risky) the Chinese

renminbi is as an international currency from the

perspectives of dollar‐and euro‐based investors. It

estimates the “safehavenness”of the currency, defined

as the extent to which the currency plays the role of a

safe haven, in both its onshore and offshore markets

alongside 20 most‐traded currencies in the world,

including those in the special drawings rights (SDR)

basket. We find that the Chinese renminbi has generally

registered a high level of safehavenness among the most‐

traded currencies since it became actively traded in the

offshore market. Compared with the other SDR curren-

cies, it consistently ranks below the Japanese yen and

U.S. dollar but above the British pound and euro on the

scale of safehavenness. Despite market fragmentation,

the safehavenness of the Chinese renminbi onshore

(CNY) is very similar to, albeit marginally lower, that of

the Chinese renminbi offshore (CNH), attributable

possibly to a stronger price discovery process in the

latter market. These estimation results show striking

consistency between dollar‐and euro‐based investors in

their assessment across various time periods character-

ized by major structural differences.

KEYWORDS

quantile regression, safe‐haven currency, special drawings rights.

JEL CLASSIFICATION

C22; F31

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INTRODUCTION

A quarter century of phenomenal growth has landed China as a major economic power on the

world stage. According to the World Bank, China’s GDP accounted for 13% of the world total

and contributed to 27% of global economic growth in 2017.

1

Parallel to the country’s economic

significance, the Chinese renminbi has also played an increasingly prominent role in the

international arena. In fact, the currency has long been considered important due to China’s

considerable expansion of external trade and cross‐border investment. From 2012 to 2018, the

Chinese renminbi settlement in goods trade registered a nearly threefold expansion, whereas

the settlement in outward foreign direct investment rocketed from RMB 4 billion to RMB

95 billion.

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According to the Society for Worldwide Interbank Financial Telecommunication

(SWIFT), the renminbi currently ranks as the world’s fifth most‐used payment currency,

accounting for 2% of global payments in December 2018.

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More recently, the renminbi has also attracted considerable attention as a currency for

investment and official reserve purposes. In particular, the renminbi’s share of total foreign

exchange reserves rose notably from 1.1% in 2016 to 1.9% in 2018, surpassing the Australian

dollar. In 2018Q2, the renminbi ranked the world’s sixth most‐used currency for foreign

exchange reserves. This may to a large extent be attributable to China’s efforts to

internationalize the renminbi, coupled with major internal and externally focused economic

reforms. One of these efforts is the promotion of the use and circulation of the renminbi outside

mainland China, making it possible for foreign investors to hold financial assets denominated

in the currency. To this end, developing an offshore market for the currency is an important

step, as this enables investors to buy and sell the currency in the open market. An official

marker of this step was the signing of the memorandum of cooperation between the People’s

Bank of China (PBoC) and the Hong Kong Monetary Authority (HKMA) in 2010, which was

accompanied by the introduction of a number of facilities that shaped the infrastructure (Hong

Kong Monetary Authority, 2016). Partly as a result, the currency has gained popularity among

central banks in addition to private investors. In particular, the number of countries holding

renminbi assets as official reserves increased to a level comparable with the number of

countries holding assets denominated in Swiss francs for the same purpose, according to an

IMF survey conducted in late 2014/early 2015 (IMF, 2016b). When this is considered with the

fact that the renminbi was included in the IMF’s Special Drawing Right basket in October 2016,

there is no doubt that the renminbi has now achieved widespread recognition as an

international currency.

Against this backdrop, it is useful and meaningful to assess how safe the Chinese renminbi is

as a financial asset.

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In the literature, there is no shortage of studies investigating the

phenomenon of safe‐haven currencies (Habib & Stracca, 2012; Kaul & Sapp, 2006; McCauley &

McGuire, 2009, December; Ranaldo & Soderlind, 2010).

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However, these studies, which attempt

to identify the properties or characteristics of safe‐haven currencies or the countries that issue

them, have unfortunately met with little success. For example, in the most comprehensive study

by Habib and Stracca (2012), a large number of economic and financial variables are examined

for a panel of 52 currencies over almost 25 years of data in an attempt to identify the

fundamentals of safe‐haven currencies. Most of these variables are intuitively very important

determinants of a currency or a country’s safe‐haven status from an economic point of view,

especially for the country's risk assessment. However, they explain only a small portion of the

safe‐haven behaviour of currencies in crisis episodes. In our view, behind the findings of these

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FONG AND WONG