The Potential of the RMB to be a Major Invoicing Currency in the Asia-Pacific Region

Published on: 2014-09-09


Many serious discussions have been generated by the Chinese government’s aspiration to internationalize the RMB. In an HKUST IEMS academic seminar, Prof. Edwin Lai, Professor of Economics, HKUST, offered his views on the RMB’s potential to become an international currency in the Asian-Pacific region.

China has taken a series of steps to promote RMB internationalization since 2008, and newspaper headlines report a huge volume of trade deals settled in the currency. However, few reports describe the extent of the RMB’s use as an invoicing currency, not just a settlement currency. Prof. Lai pointed out that invoicing in RMB requires greater commitment from trade partners and enables firms operating in China to effectively hedge against exchange rate risks. Trade data suggest that only a small fraction of China’s trade with foreign countries is invoiced in RMB.

Figure 1. Share of Renminbi Settle in China's Cross-border Trade. Figure 2. Invoicing currency distribution: Asia-Pacific.  Provided by Edwin Lai.

Figure 1. Share of Renminbi Settle in China’s Cross-border Trade. Figure 2. Invoicing currency distribution: Asia-Pacific. Provided by Edwin Lai.

Prof. Lai and co-authors develop a model which shows that there is a convex relationship between the invoicing share of a currency and the economic size of the issuing country. Invoicing decisions also depend upon thick market externalities, which refers to the phenomenon that use of a currency by some firms makes it more attractive to be used by other firms. Such externalities are influenced by the degree of convertibility of the currency, the degree of capital account openness and financial market maturity of the issuing country.
They provide empirical support for their argument by analyzing two data sets: one on the invoicing shares of eleven currencies
used in Thailand’s trade during 1993 and 2011, and the other on the invoicing shares of the Euro for 35 countries.
Using the experience of the Euro as a benchmark, they predict the expected invoicing shares of RMB today and conclude that the RMB has been significantly under- used in trade invoicing.

Prof. Lai attributes the under-use to the lack of thick market externalities associated with RMB use in international trade. He urges China to relax its capital controls, allow full convertibility of the RMB, and reform its financial sector much more deeply in order for the offshore RMB market to help the RMB become a major invoicing currency.

Figure 2. Invoicing currency distribution: Asia-Pacific.  Provided by Edwin Lai.

Figure 2. Invoicing currency distribution: Asia-Pacific. Provided by Edwin Lai.

About the Speaker

Before joining HKUST in 2009, Edwin Lai was Senior Research Economist and Advisor at the Federal Reserve Bank of Dallas, the Federal Reserve System, USA, from August 2007 to June 2009. Before that he was Assistant Professor at Vanderbilt University, USA, Associate Professor (with tenure) at City University of Hong Kong and Associate Professor (with tenure) at Singapore Management University. Prof. Lai has been a consultant to the World Bank, a visiting scholar with Boston University, Kobe University and University of Munich, visiting fellow (twice) with Princeton University and visiting research fellow with the Hong Kong Institute for Monetary Research. He is a fellow of the CESifo Research Network. He is an associate editor of the journal Review of International Economics. He got his B.Sc. in engineering from University of Hong Kong and A.M. and Ph.D. in economics from Stanford University, USA. Prof. Lai’s has published in American Economic Review, RAND Journal of Economics, International Economic Review, Journal of International Economics and other respected journals in economics. Much of Prof. Lai’s past and present research is related to coordination of intellectual property protection between developed and developing countries.

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