Safehavenness of the Chinese renminbi

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 currencies, 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 characterized by major structural differences.