25 October 2016
A growing number of foreign trade transactions are settled in renminbi, but only a fraction of them are invoiced in the currency. Photo: CNSA
A growing number of foreign trade transactions are settled in renminbi, but only a fraction of them are invoiced in the currency. Photo: CNSA

Next milestone for RMB: become a trade invoicing currency

If a currency intends to be an international one, the country’s residents and non-residents should be allowed to use it broadly in international trade, financing and the settlement of transactions in financial products.

These functions are interrelated.

One indicator that reflects the level of a currency’s internationalization is to what extent it is used in trade invoicing.

Usually, trade settlement and invoicing are denominated in the same currency.

But the renminbi is somewhat different.

Renminbi trade invoicing generally means settlement in renminbi; however, if a trade deal is settled in renminbi, it doesn’t mean the deal is invoiced in renminbi.

For example, in 2012, only less than 12 percent of China’s commodities trades were settled in renminbi.

Among them, only 56 percent of the trades used renminbi as the invoicing currency.

At present, about 18 percent of China’s commodities trades are settled in renminbi. Such a ratio is still very low for China’s exports.

Although news reports say the value of renminbi-settled trade deals has greatly increased, only a small part was invoiced in renminbi, so the renminbi still faces a long road to internationalization.

That’s because trade invoicing, instead of trade settlement, is the core indicator of the level of a currency’s internationalization.

For foreigners, accepting renminbi invoicing is a deeper commitment, because they will have to shoulder the exchange rate risk for the large renminbi reserves they hold.

Whether foreigners will accept renminbi as an invoicing currency depends mostly on the economy’s fundamentals and the confidence they have in the renminbi.

Using the renminbi as the settlement currency is a simpler matter that depends on short-term factors.

For example, if the renminbi appreciates as foreigners expect, no matter whether they are buying or selling Chinese products, they will prefer to hold more renminbi and settle the deals in renminbi.

But if the expectation of one-way appreciation of the currency is no longer valid, this factor doesn’t apply.

As an offshore renminbi center, which handles 95 percent of renminbi-settled export trades, Hong Kong will be affected if the market no longer expects the renminbi to appreciate.

This happened in September.

That month, after the sudden devaluation of the currency brought about by Beijing’s reform of the renminbi exchange system, global renminbi payments decreased 5.57 percent from a year earlier, while those in other currencies rose 7.56 percent.

On the other hand, if the market accepts the renminbi as an invoicing currency, and a large amount of China’s exporting deals are invoiced in renminbi, Hong Kong’s renminbi business will be more stable.

The day when non-China-related trades are denominated in renminbi, for example in oil and futures, is the day the renminbi can be called an international currency.

How to achieve this target?

An internationalized currency is one that is broadly used in trade, investment and reserves.

As the three factors are correlated, boosting renminbi-denominated trade can be one of the engines for its internationalization.

Companies will consider two factors when choosing an invoicing currency:

(1) If competitors use a certain currency, then there’s a higher possibility that a company will choose the same one.

(2) The depth of the renminbi market. To increase this, there are three methods: to improve its convertibility, to lift restrictions and to strengthen the financial system’s maturity and stability.

We think China needs to further remove restrictions on capital and allow the renminbi to be freely exchangeable.

Looser restrictions will lead to the free flow of capital across the border and thus make it easier for foreigners to invest in China’s onshore financial products and increase the demand for offshore renminbi.

Chinese residents, too, will have easier access to overseas financial products and supply more offshore renminbi.

Above all, reforms and development of the financial system and a refined regulatory scheme are the prerequisites.

The article appeared in the Hong Kong Economic Journal on Dec. 29.

Translation by Myssie You

[Chinese version中文版]

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Professor, Department of Economics, HKUST Business School; former senior research economist and advisor, Federal Reserve Bank of Dallas

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