Effective exchange rates in Asia with entrepot and growing intra-regional trade

in "China and Asia: Economic and Financial Interactions" edited by Yin-Wong Cheung and Kar-yiu Wong, Riutledge

Abstract

Discussion of exchange rate policy in Asia would benefit from appropriate measures of exchange rates on a multilateral basis. This paper refines the construction of Asian effective exchange rates, to make allowances for the role of Hong Kong SAR as an entrep├┤t and to reflect the fast-growing intra-regional trade. Without adjusting for entrepot trade, the calculation of the Chinese renminbi's effective exchange rate would overstate the influence of the US dollar because of the link of the Hong Kong dollar to the US dollar. By the same token, effective exchange rates of other Asian countries could understate the weight of the renimnbi relative to the Hong Kong dollar and thereby lessen the regional impact of the renminbi's exchange rate becoming more stable in effective terms.

The complete paper is published in the book: "China and Asia: Economic and Financial Interactions".