Asian Currency Unit and RMB Exchange Rate Reform

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Asian Currency Unit and RMB Exchange Rate Reform

• He Fan
• Institute of World Economics and Politics
• Chinese Academy of Social Sciences
• May 2005

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Background

• Asian financial crisis and the development of
  Asian monetary cooperation
• Global imbalance and Asians position
• Proposals for Exchange rate coordination
• Japan and ACU

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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.

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Calculation of the AMU (Ogawa and Shimizu)

• Component currencies ASEAN3 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 ASEAN3s 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 countrys
  USD-Euro exchange rate.
• The benchmark year 2000-2001.

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Weights for major ASEAN3 currencies
China Japan Korea Singapore Malaysia Indonesia Thailand
Trade volume() 21.65 27.31 12.86 11.9 8.85 4.67 6.6
GDP() 47.93 28.3 6.65 0.81 1.83 5.56 3.56
weight 34.79 27.8 9.76 6.36 5.34 5.12 5.08
??Ogawa and Shimizu(2005)
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Calculating Nominal and Real Deviation Indicators

• AMU Deviation Indicators

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• AMU real deviation indicators

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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.

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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?

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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 ASEAN3 framework

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• Thanks