Trade Invoicing in the Major Currencies in the 1970s-1990s: Lessons for renminbi internationalization

In this paper, we investigate how much a major currency is used for trade invoicing by focusing primarily on the experiences of the U.S. dollar, the Japanese yen, and the Deutsche mark (DM) in the 1970s through the 1990s. We then attempt to draw lessons for China's renminbi (RMB) internationalization. Our data on the shares of the three major currencies in export invoicing show that the dollar has unequivocally been a global invoicing currency, the DM was a major regional currency in Europe, while the yen has never been a global or a regional currency. DM invoicing was driven by European countries' trade ties with Germany. In contrast, the yen was not and is still not widely used for trade invoicing by Asia-Oceania countries despite the region's strong trade ties with Japan. Our regression analysis on the determinants of the major currency share for trade invoicing (also including the UK pound sterling, the French franc, the Italian lira, and the Swiss franc) in the 1970-1998 period suggests that the invoicing share of a major currency tends to be positively affected by the degree of other economies' trade ties with the major currency country and negatively affected by the degree of their financial development or openness. Also, the major currency share for trade invoicing is affected by both other economies' assigned weights of the major currencies in their implicit currency baskets and these economies' trade shares with major-currency zone countries. Economies belonging to the U.S. dollar (DM) zone tend to invoice their trade more in the dollar (DM) and less in the DM (dollar). The use of yen for trade invoicing is not much affected by these factors. European countries largely belonged to the DM zone, thereby contributing to higher DM use for trade invoicing, whereas Asia-Oceania countries belonged mainly to the U.S. dollar zone, leading to a higher degree of dollar use. We also find that major currency countries tend to invoice their trade in their currencies when they have a large presence in international trade and high levels of per capita income, and when their financial markets are more developed and sufficiently open. For China, its low level of per capita income, limited financial openness, and the presence of the U.S. dollar bloc in Asia stand as a challenge to the nation's ambition to promote the RMB as a major trade-invoicing currency