A Study on the Exchange Rate Fluctuation Alleviation Effect of RMB Internationalization —From the Dual Perspectives of Medium of Exchange and Store of Value

Abstract

Since the “8.11” exchange rate reform in 2015, the degree of market-oriented determination of the RMB exchange rate has significantly increased, with considerably wider two-way fluctuations, substantially raising the exchange rate risks and hedging costs for China’s cross-border trade. Meanwhile, since China officially launched the RMB internationalization process in 2010, significant progress has been made in cross-border settlement and payment, commodity pricing, and international value storage. Against this background, this paper focuses on a core question: Has the enhanced function of RMB as an international medium of exchange in recent years successfully mitigated the negative impact of increased RMB exchange rate fluctuations on cross-border goods trade? Furthermore, what role has the growing scale of offshore RMB assets, as a store of value, played in this relationship?

Based on monthly measurements of RMB exchange rate fluctuations during the study period, this paper employs time series data from January 2012 to October 2023 (142 months) and the multivariate E-G two-step method to examine the relationship between RMB-USD nominal exchange rate fluctuations, RMB internationalization level, and China’s goods trade volume. The research finds that increased RMB-USD nominal exchange rate fluctuations significantly suppressed alleviating effect of RMB as an international medium of exchange. Heterogeneity tests reveal that this effect is primarily evident in general trade, export trade, and resource/capital-intensive product trade. Threshold effect analysis shows that once offshore RMB asset stock accumulates to a certain level, the alleviating effect of RMB settlement on exchange rate fluctuations becomes more significant, highlighting the positive role of RMB as a store of value in reducing exchange rate fluctuation impacts. Specifically, the accumulation of offshore RMB stocks and bond assets produces a threshold effect on alleviating exchange rate fluctuations, while deposits and loan assets do not show significant threshold effects. In advancing RMB internationalization, China should maintain market-oriented mechanisms, while expanding the proportion of RMB settlement and increasing offshore RMB stocks, fully leveraging RMB functions as both a medium of exchange and a store of value to effectively reduce exchange rate fluctuation risks for China and its trading partners.

Compared to previous literature, this paper’s potential marginal contributions are: First, it comprehensively analyzes the relationship among exchange rate fluctuations, local currency internationalization, and import-export trade, using the interaction term between RMB exchange rate fluctuations and RMB settlement proportion as a key variable to explore the exchange rate fluctuation alleviating effect of currency internationalization on trade. Second, beyond verifying this alleviating effect from the perspective of international currency’s medium of exchange function, it also employs threshold effect models to explore how different levels and types of offshore RMB asset stocks affect the exchange rate fluctuation alleviating effect of RMB settlement from the store of value function perspective.

This study provides decision-making reference for monetary authorities to rationally and coordinately design exchange rate market policies and RMB internationalization policies, offering empirical support for steadily and solidly advancing the RMB internationalization process.