China's Dominance Hypothesis and the Emergence of a Tri-polar Global Currency System


  • We are grateful to the editor and two anonymous referees for helpful comments and suggestions as well as to participants at the 2011 Tsinghua University-Columbia University Conference, 2011 European Economic Association meetings, 2012 Royal Economic Society Conference and 2012 CEPII–GEP–IFO Conference. The views expressed in this study are those of the authors and do not necessarily reflect those of the European Central Bank or the Eurosystem.


This study assesses whether the international monetary system is already tri-polar by testing what we call China's ‘dominance hypothesis’, i.e. whether the renminbi already influences exchange rate and monetary policies strongly in Asia, a direct reference to the old ‘German dominance hypothesis’ which ascribed to the German mark a dominant role in Europe in the 1980s. Using a global factor model of exchange rates and a complementary event study, we find evidence that the renminbi has become a key driver of currency movements in Asia since the mid-2000s, especially since the global financial crisis, in line with China's dominance hypothesis.