Fear of appreciation in East and Southeast Asia: The role of the Chinese renminbi

Our study brings into light evidence of the important role of the Chinese renminbi in shaping the exchange rate behavior of a select group of East Asian currencies. Results obtained suggest that there is an additional dimension to the ‘fear of appreciation’ or ‘fear of floating-in-reverse’ behavior, initially coined by Levy-Yeyati and Sturzengger (2007) with regard to the experiences of this group of East Asian currencies. In particular, we find that there is a greater degree of aversion to appreciation of these East Asian currencies—specifically, the Philippine peso and the Thailand baht—against the Chinese renminbi than against the US dollar. This heightened fear of appreciation against the Chinese currency confirms that trade competition matters in this part of the world and that this fear to appreciate plays a central role in the exchange rate management of major East Asian currencies. As envisaged, the increasing role of China as a major trading hub in the region as well as globally, implies that the Chinese renminbi would exert a growing significant influence on other currencies in the region.