Micro Behavioral Mechanisms Linking Geopolitical Risk and RMB Internationalization: Evidence from Belt and Road Countries

Abstract

This article explores how geopolitical risks influence RMB internationalization based on a behavioral perspective introducing the theories of “limited attention” and “psychological account”. The research takes the monthly trade RMB settlement data of 15 countries along the “Belt and Road” from 2015 to 2023 as samples, and constructs a two-way fixed effects model. The research found that geopolitical risk plays a significantly positive role in promoting RMB use in the countries, indicating that against a backdrop of rising global political uncertainty, RMB has become an important choice for the countries to diversify their currency allocation. In addition, market risk aversion will restrict RMB use, but does not have a positive effect on the above relationship, reflecting the separation between political risk and market risk in the psychological account during the decision-making process. Furthermore, the heterogeneity analysis shows that countries with high trade dependence on China may turn to the traditional risk-aversion currency when the risk rises, while countries with low one may choose RMB as an alternative. This research integrates the behavioral finance and the currency internationalization theory, and provides policy implications for promoting RMB internationalization.