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Invoicing Currency in International Trade: An Empirical Investigation and Some Implications for the Renminbi

Author

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  • Edwin L.-C. Lai

    (Hong Kong University of Science and Technology and Hong Kong Institute for Monetary Research)

  • Xiangrong Yu

    (Hong Kong Institute for Monetary Research)

Abstract

To play the role of a unit of account, an international currency must be a currency widely used to invoice international trade. This paper investigates the determinants of the use of currency in trade invoicing and evaluates the potential of the renminbi for the denomination of cross-border transactions in the Asia-Pacific region. In particular, we develop a simple model and establish the evidence showing that there is a convex relationship between the invoicing share of a currency and the economic size of its issuing country because of a coalescing effect and thick market externalities. We use the ratio of the foreign exchange turnover share of a currency to the global GDP share of its issuing country as a proxy for the size of thick market externalities, which we argue reflects capital account openness, financial development, and exchange rate stability of a country. This ratio is very small for the renminbi compared with that for established international currencies. Our quantitative analysis suggests that the renminbi can be a major invoicing currency in the region only if China sufficiently opens up its capital account and liberalizes its financial sector. We also draw a parallel between the renminbi and the euro and forecast the invoicing share of the renminbi in the Asia-Pacific region if the renminbi market attained the same degree of thickness as the euro.

Suggested Citation

  • Edwin L.-C. Lai & Xiangrong Yu, 2014. "Invoicing Currency in International Trade: An Empirical Investigation and Some Implications for the Renminbi," Working Papers 082014, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:082014
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    References listed on IDEAS

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    2. Mohammed Ahmed, Abdullahi, 2019. "China’s Bilateral Currency Swap Agreement: Strategic Move to Foster Political and Financial Hegemony," MPRA Paper 109879, University Library of Munich, Germany, revised 08 Oct 2019.
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    4. Keddad, Benjamin, 2019. "How do the Renminbi and other East Asian currencies co-move?," Journal of International Money and Finance, Elsevier, vol. 91(C), pages 49-70.
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    More about this item

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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