China’s Belt and Road Initiative and the Rise of Yuan –Evidence from Pakistan

Abstract

The Chinese yuan is poised to become an international currency and play a major role in global finance which will havesignificantconsequencesfor countries, like Pakistan,which haverecently seen large inflows of the Chinese capital. Thispaper presents empirical evidence ofthe evolving nature of the yuan, as reflected in the statistical distribution of the exchange rate, with a particular focus on the period afterthe initiation of Belt and Road Initiative (BRI) projects. We observe that the currency’s empirical distribution exhibits tell-tale characteristics of a managed currency. Over time, though the yuan’s statistical properties have converged towards those ofother hard currencies, they still remain distinct. We find that there is a long-term trend of increasing correlations over time as indicatedby the Dynamic Conditional Correlations (DCC), which is pronounced in the post BRI period. Furthermore, the yuan is increasingly being influenced by other major currencies in the recent periods, indicating increasingly integration of the currency in global foreign exchange markets. This articlediscusses the implicationsof the rise oftheyuan for the management of Pakistan’s foreign currency reserves and exchange rate: it should be driven by the yuan’s evolving convertibility, credibility and liquidity.