Taiwan Dollar (TWD) and Chinese Yuan (CNY) shows interesting movement

 

China and Taiwan share similarities. Both are export driven economies that rely heavily on trade, and they often compete in similar export goods on the global stage. For example, Peter C. Y. Chow, professor of economics at the City College and Graduate Center, City University of New York, stated that “for overall products in the first round of tariff goods, the similarity index between China and Taiwan is 52.5%, which is the highest by comparisons with EU, Japan, Korea and other countries.”

Source: Taiwan’s Challenge and Opportunity amid the US-China Trade War

 

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Export similarity index (ESI), developed by Finger and Kreinin (1979), is intended to measure the similarity between exports of any two countries to a third market. The index is based on the share of each product in each country’s total exports and is calculated as the sum of the minimum value for each product.

 

Hence, exchange rates must be related to each other as well.

 

The following chart illustrates Chinese Yuan and Taiwan Dollar since 2013.

 

Taiwan Dollar and Chinese Yuan

Source: Capital IQ

 

The chart shows a quite similar exchange rate movement against the greenback, albeit the movement has diverged since the onset of US-China trade war in 2018. While both currencies have depreciated against the Greenback, the magnitude of depreciation is greater for China, which is not surprising because US is targeting China more than other countries. Also Taiwan Dollar started to appreciate by mid-2019 while Chinese Yuan is still depreciating.

 

Another interesting point is that Taiwanese Dollar seems to precede Chinese Yuan by one year. After adjusting for one year the data for one year (i.e. bringing backward one year data for Chinese Yuan) from January 2013 to March 2017, the correlation between the two exchange rates is 94%. If anyone is interested in the movement of Chinese Yuan, then it may be a good idea to have a look at movement of Taiwan Dollar as a preceding benchmark.

 

Taiwan Dollar and Chinese Yuan adjusted

Source: Capital IQ

 

What do these charts and interpretation illustrate? The takeaway is the following:

  • Since the start of the US-China trade war in 2018, two exchange rates have diverging significantly
  • Taiwan Dollar may have been a good indicator of future performance of Chinese Yuan by one year.
  • Will the second round of US-China war after COVID-19 pandemic—this time may not be limited just to trade—cause the divergence of the two currencies again?

 

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