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

37 Pages Posted: 24 Jan 2015

See all articles by Edwin L.-C. Lai

Edwin L.-C. Lai

Hong Kong University of Science & Technology (HKUST) - Department of Economics

Xiangrong Yu

Hong Kong Monetary Authority

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Date Written: January 2015

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 currencies 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 (FX) 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 the country. This ratio is very small for the renminbi compared with the ratios 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 liberalises 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

Lai, Edwin L.-C. and Yu, Xiangrong, Invoicing Currency in International Trade: An Empirical Investigation and Some Implications for the Renminbi (January 2015). The World Economy, Vol. 38, Issue 1, pp. 193-229, 2015. Available at SSRN: https://ssrn.com/abstract=2554797 or http://dx.doi.org/10.1111/twec.12211

Edwin L.-C. Lai (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China

Xiangrong Yu

Hong Kong Monetary Authority ( email )

55/F, Two International Finance Centre
8 Finance Street, Central
Hong Kong

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