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Asian Currency Unit and RMB Exchange Rate Reform

Asian Currency Unit and RMB Exchange Rate Reform. He Fan Institute of World Economics and Politics Chinese Academy of Social Sciences May 2005. Background. Asian financial crisis and the development of Asian monetary cooperation Global imbalance and Asian ’ s position

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Asian Currency Unit and RMB Exchange Rate Reform

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  1. Asian Currency Unit and RMB Exchange Rate Reform He Fan Institute of World Economics and Politics Chinese Academy of Social Sciences May 2005

  2. Background • Asian financial crisis and the development of Asian monetary cooperation • Global imbalance and Asian’s position • Proposals for Exchange rate coordination • Japan and ACU

  3. Functions of the ACU • The ACU is to be constructed as a weighted index of Asian currencies. It can be used as an indicator to monitor how Asian currencies are moving collectively vis-à-vis key external currencies, such as the US dollar or the euro, and how each Asian currency is moving against such a regional benchmark • A well-designed ACU index may be useful for the market as a denomination of market transactions such as bond issuance . • No binding rules for Asian economies to change their exchange rate regime. Not an “Asian currency” with the function as “money” • Innovative idea for promoting Asian monetary cooperation: regional surveillance, benchmark, linkage to other mechanism like the reserve pooling.

  4. Calculation of the AMU (Ogawa and Shimizu) • Component currencies: ASEAN+3 currencies • Similar method as that used to calculate the European Currency Unit (ECU) • Weight of each currency in the basket is based on its share in regional GDP measured in PPP and the regional trade volume. • The weighted average of the US dollar and the Euro is based on ASEAN+3’s trade volume with the U.S. and the Euro area. The weights on the USD and the Euro are set at 65% and 35% respectively. • The nominal exchange rate of the AMU in terms of the USD-Euro: the weighted sum of each country’s USD-Euro exchange rate. • The benchmark year: 2000-2001.

  5. Weights for major ASEAN+3 currencies 来源：Ogawa and Shimizu(2005)

  6. Calculating Nominal and Real Deviation Indicators • AMU Deviation Indicators ：

  7. AMU real deviation indicators：

  8. Shortcoming of the AMU • No solid theoretical foundation for choosing base year. • The whole region has trade balance does not mean individual economies all can enjoy trade balance. • Even if each country had trade balance in the base year, it does not mean the equilibrium exchange rate should be kept fixed in the future. • The calculation of AMU deviation indicator does not take the dynamics of equilibrium exchange rate into consideration.

  9. AMU and RMB exchange rate reform • Goals for the reform of RMB exchange rate policy: Equilibrium exchange rate: to avoid misalignments Weighted exchange rate: to maintain competitiveness • Will the Pegging to AMU help the RMB to approach equilibrium exchange rate? The issuing of AMU denominated bond will encourage market participants to find the right price for the RMB Collective pegging to the AMU can help to alleviate speculations on the RMB 。Will the pegging to AMU helps to stabilize weighted exchange rate of RMB?

  10. Potential problems • Peg to the AMU can not fully reflect the changes of the fundamentals in Chinese economy • Excessive fluctuation of the bilateral USD/RMB exchange rate • Unclear rules for the formal ACU: ADB is introducing new weights into the calculation • No clear vision for full-fledged Asian monetary cooperation • Unclear voting mechanism for an institutionalized Asian monetary fund • The constrains of the existing ASEAN+3 framework

  11. Thanks

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