Measuring the Long-Run Correlations Among Chinese and ASEAN Countries' Currencies and the Impact of RMB Internationalization on the Correlations

In this study, the DCC-MIDAS approach and its extension are adopted to reveal the long-run correlations among Chinese currency and those of ASEAN countries, and the role of RMB internationalization in driving the movements of the long-run currency correlations. The findings show that: (1) significant long-run currency correlations have been identified in the China-ASEAN Free Trade Area in general, however, the correlations are weakened during the COVID-19 pandemic; (2) the degree of correlation highly relates to the economic development of a country and Singapore plays a leading role in the ASEAN foreign exchange markets; (3) RMB internationalization is the main driving force to enhance the currency correlations in the region and the importance of Singapore dollar tends to be partly replaced by China. With respect to the increasing impact of the RMB in the China-ASEAN Free Trade Area, we provide policy implications to the Chinese government to maintain the stability of its currency in the region for the potential transition of the currency regionalization driven by the RMB. We contribute to the literature on currency linkage and integration by analyzing the long-run relationship to avoid the biased results given by the irregular short-run shocks and we make the first attempt to reveal the impact of RMB internationalization in shaping the long-run currency correlations in the free trade area dominated by China