The Rise of the 'Redback' and the People's Republic of China's Capital Account Liberalization: An Empirical Analysis of the Determinants of Invoicing Currencies

49 Pages Posted: 10 Apr 2014

See all articles by Hiro Ito

Hiro Ito

Portland State University - Department of Economics

Menzie David Chinn

University of Wisconsin, Madison - Robert M. La Follette School of Public Affairs and Department of Economics; National Bureau of Economic Research (NBER)

Date Written: April 9, 2014

Abstract

This study investigates the determinants of currency choice for trade invoicing in a cross-country context while focusing on the link between capital account liberalization and its impact on the use of the renminbi (RMB). The authors find that while countries with more developed financial markets tend to invoice less in the US dollar, countries with more open capital accounts tend to invoice in either the euro or their home currency. These results indicate that financial development and financial openness are among the keys to challenging the US dollar dominance in general, and to internationalizing the RMB for the People’s Republic of China (PRC). The model also suggests that the share of the RMB in export invoicing should have been higher than the actually observed share of less than 10%. The underperformance of RMB export invoicing can be attributed to the inertia in the choice of currency for trade invoicing; once a currency is used for trade invoicing or settlements, it becomes difficult for traders to switch from one currency to another. This same phenomenon was also observed in the cases of the Japanese yen and the euro at their inceptions as international currencies. The model predicts that the share of RMB invoicing for the PRC’s exports will rise to above 25% in 2015 and above 30% in 2018, whether or not the PRC implements drastic financial liberalization. As the near future path of RMB use is also expected to be inertial, these forecasts are probably at the upper end of the actual path of RMB export invoicing.

Keywords: RMB internationalization, capital account liberalization, US dollar, export invoicing, currency invoicing, settlement currency

JEL Classification: F32, F41

Suggested Citation

Ito, Hiro and Chinn, Menzie David, The Rise of the 'Redback' and the People's Republic of China's Capital Account Liberalization: An Empirical Analysis of the Determinants of Invoicing Currencies (April 9, 2014). ADBI Working Paper 473, Available at SSRN: https://ssrn.com/abstract=2422756 or http://dx.doi.org/10.2139/ssrn.2422756

Hiro Ito (Contact Author)

Portland State University - Department of Economics ( email )

Portland, OR 97207-0751
United States
503-725-3930 (Phone)
503-725-3945 (Fax)

HOME PAGE: www.econ.pdx.edu

Menzie David Chinn

University of Wisconsin, Madison - Robert M. La Follette School of Public Affairs and Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706-1393
United States
608-262-7397 (Phone)
608-262-2033 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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