International use of the renminbi for invoice currency and exchange risk management: Evidence from the Japanese firm-level data

North American Journal of Economics and Finance 46 (2018) 286–301

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International use of the renminbi for invoice currency and exchange risk management: Evidence from the Japanese firm-level data☆ Kiyotaka Satoa,b, Junko Shimizuc,

T

⁎

a

Department of Economics, Yokohama National University, Japan School of Business and Law, Edith Cowan University, Australia c Faculty of Economics, Gakushuin University, Japan b

A R T IC LE I N F O

ABS TRA CT

JEL classification: F31 F33 F23

The use of the Chinese renminbi (RMB) is said to have been increasing in recent years for trade invoicing, due to active promotion policies implemented by the Chinese government. However, only patchy information has been presented in the literature on the use of RMB in Chinese trade. Using the information obtained from two-round, large-scale questionnaire surveys, this paper presents new evidence on the use of RMB and exchange risk management by Japanese subsidiaries operating in China and other Asian countries. We find that Japanese subsidiaries in China mainly use the U.S. dollar, and to a lesser extent, the yen in trade with other countries. However, they increase the use of RMB in intra-firm trade with Japan. The result of Logit estimation indicates that RMB transactions will grow further if overseas subsidiaries have more discretion in exchange rate risk management. Removing capital controls on onshore RMB (CNY) market is another necessary condition to promote RMB internationalization.

Keywords: Renminbi internationalization Invoice currency Overseas subsidiary Intra-firm trade Production network Exchange risk management

1. Introduction In recent years, the use of Chinese renminbi (RMB) has been increasing for trade invoicing, reflecting a rapid growth and development of the Chinese economy. The internationalization of RMB is typically defined as its greater use in international transactions including cross-border trade and financial/capital transactions. Various policy reforms to enhance RMB cross-border transactions have been implemented by the Chinese government. RMB-related deposits, bonds, and derivatives in offshore markets have also been expanding. Thus, RMB internationalization has been promoted by policy-driven efforts as well as market-driven forces. According to Eichengreen and Kawai (2014), RMB internationalization started in trade-related transactions. In 2009, China started to sign a bilateral currency swap agreement with various countries to provide RMB liquidity for trade and direct investment. At the end of May 2015, China signed a bilateral RMB-denominated swap arrangement with 32 foreign central banks, which enabled Japanese multinational companies (MNCs) operating in both China and its partner countries to settle cross-border trade and direct investment in RMB. In July 2009, the Chinese government launched a pilot scheme that allowed the use of RMB in trade settlements

☆ This study was conducted as a part of the Project “Exchange Rates and International Currency” undertaken at the Research Institute of Economy, Trade and Industry (RIETI). We appreciate financial support of RIETI for conducting questionnaire surveys with Japanese overseas subsidiaries. We would like to thank Takatoshi Ito and Satoshi Koibuchi who collaborate with us for this research project. We are also grateful for Donald Lien, Zhaoyong Zhang, Eiji Ogawa, Etsuro Shioji, Yushi Yoshida, Keiko Ito, and Taiyo Yoshimi for their helpful comments on the earlier version of this paper. ⁎ Corresponding author. E-mail addresses: [email protected] (K. Sato), [email protected] (J. Shimizu).

https://doi.org/10.1016/j.najef.2018.04.013

1062-9408/ © 2018 Elsevier Inc. All rights reserved.

North American Journal of Economics and Finance 46 (2018) 286–301

K. Sato, J. Shimizu

Fig. 1. Over-the-Counter (OTC) Foreign Exchange Turnover (BIS, 1998–2013). Note: OTC transactions include spot transactions, outright forwards, foreign exchange swaps, currency swaps, options, and other products, which are adjusted for local inter-dealer double-counting (i.e., “net-gross” basis). The data may differ slightly from the national survey data owing to differences in aggregation procedures and rounding. The data for the Netherlands are not fully comparable over time due to reporting improvements in 2013. Source: BIS, Triennial Central Bank Survey: Global Foreign Exchange Market Turnover in 2013, Monetary and Economic Department, February 2014.

with ASEAN countries, Hong Kong, China, Macau, and five mainland cities. Since then, authorization for RMB-denominated trade has been extended nationwide. At the same time, China has also promoted direct RMB trading with non-U.S. dollar currencies, which eliminated the need for foreign counterparts to conduct indirect transactions by buying and selling U.S. dollars.1 In addition to the above policies, an offshore market plays an important role in expanding RMB transactions. Although RMB is not yet fully convertible due to capital controls and regulations, the Chinese government has promoted an offshore market in which RMB can be used outside of the mainland. Offshore RMB (CNH) markets are developing rapidly around the world. Official RMB clearing banks have been established in 18 countries across Asia, Europe, Middle East, and North and South America (as of December 2015). Recently, CNH has been actively used for cross-border trade, finance, and direct investment. In line with continuous efforts to internationalize RMB, its role has expanded in global foreign-exchange trading. According to the Bank for International Settlements (BIS) survey, RMB became the ninth most actively traded currency in 2013, with a share of 2.2% in global foreign-exchange volumes.2 Compared to other Asian currencies, RMB turnover has soared, especially since China moved to a managed floating regime in July 2005. RMB’s daily average trading turnover was the smallest among seven Asian currencies in 2004, but became USD44 billion in 2013, which was the largest among the currencies (Fig. 1). The role of RMB as a settlement currency has also gradually increased. Fig. 2 shows an increase in the share of RMB trade settlements from 2010 to 2013. During the second quarter of 2010, the share of RMB trade settlements was only one percent of the Chinese total foreign trade. RMB trade settlements then increased almost 17-fold by the second quarter of 2013, reaching 16.5% of China’s total trade.3 According to the Society of Worldwide Interbank Financial Telecommunication (SWIFT) data, in August 2015, RMB entered the top four of world payment currencies in value, reaching a record high share of world payments.4 From September 2015, however, RMB fell back to the fifth position as an international settlement currency and was overtaken by the yen. Although previous studies have mainly discussed the share of RMB in cross-border trade and settlements, to the best of our knowledge, firm-level information on RMB transactions has not been presented in the literature.5 Since China is a regional and global manufacturing hub, where foreign MNCs actively operate, it is necessary to investigate the extent to which MNCs use RMB for trade invoicing, especially in intra-firm trade. Utilizing the firm-level information obtained through large-scale questionnaire surveys with Japanese overseas subsidiaries, this paper presents new evidence for the choice of RMB as an invoice currency by Japanese MNCs operating in China and other Asian countries along their regional and global production network. We find that, although RMB is extensively used for local sales and procurement in China, Japanese MNCs operating in China mainly use the U.S. dollar, and to a lesser extent, the yen in trade with other countries. We also observe that Japanese MNCs in China increase the use of RMB in intra-firm trade with Japan, which suggests that RMB-invoiced transactions will grow further as bilateral trade between China and Japan expands. In addition, we conduct Logit estimation to examine the determinants of subsidiaries’ RMB-

1 The direct RMB trading started with Malaysia (August 2010), the Russian Federation (November 2010), Japan (June 2012), and Australia (April 2013). In June 2014, China Foreign Exchange Trading System (CFETS) announced to launch direct trading between RMB and Great Britain Pound (GBP). 2 This is mostly driven by a significant expansion of offshore RMB trading. 3 According to Eichengreen and Kawai (2014), more than 80% of these trade settlements have been with Hong Kong. 4 See the information on RMB Tracker on the website of SWIFT (https://www.swift.com/our-solutions/compliance-and-shared-services/business-intelligence/renminbi/rmb-tracker). 5 For a good overview of the recent progress in RMB internationalization, see Xu and He (2015) and Ito (2017).

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Fig. 2. Volume and Share of RMB Trade Settlement. Note: Ratio of RMB trade settlement in total trade in 2014–2015 is from RMB internationalization report 2016, while data for 2010–2013 is calculated based by authors based on the RMB trade settlement and total trade(customs). Source: RMB Internationalization Report 2016, International Monetary Institute, Renmin University of China.

invoiced trade. The estimated result shows that subsidiaries’ discretionary management for exchange rate risk is likely to promote RMB-invoiced trade. RMB transactions would have grown further if overseas subsidiaries had more discretion in exchange rate risk management. The remainder of this paper is organized as follows. Section 2 summarizes the results of our questionnaire survey conducted in 2010 and 2014. In Section 3, we discuss the firm-level choice of invoice currency, especially in intra-firm trade, focusing on China and other Asian countries. In Section 4, we show the empirical analysis conducted to investigate the determinants of subsidiaries’ RMB-invoiced trade. Finally, Section 5 concludes this paper. 2. Questionnaire survey of Japanese overseas subsidiaries 2.1. Questionnaire survey In August 2010 and November 2014, we conducted large-scale questionnaire surveys (henceforth the “2010 RIETI Survey” and “2014 RIETI Survey,” respectively) of overseas subsidiaries of Japanese firms, which was financially supported by the Research Institute of Economy, Trade and Industry (RIETI).6 We sent out the questionnaires to 16,020 and 18,932 subsidiaries in August 2010 and November 2014, respectively. These subsidiaries were chosen from Toyo Keizai’s Overseas Japanese Companies database (henceforth the “OJC database”). In the 2010 RIETI Survey, we chose the subsidiaries of manufacturing, wholesale, or controlling offices that operated in 21 Asia-Pacific countries (areas), three North-American countries (areas), and 37 European countries (areas). In the 2014 RIETI Survey, we added the subsidiaries operating in South American countries to the sample.7 Finally, 1479 and 1640 subsidiaries responded to the questionnaires conducted in 2010 and 2014, respectively. While collecting the data on the invoice currency for both production and sales subsidiaries through the questionnaire survey, we focused on the invoice currency decision of the production subsidiaries. Japanese firms have built a global production and sales network in Asia where intra-firm trade plays an important role. The export and import behavior of Japanese MNCs in Asia, especially in China, has gained considerable attention. We thus investigate here the extent to which the use of RMB has grown in the trade of Japanese MNCs along the production chains. 2.2. Factors impeding RMB transactions In addition to the information on the invoice currency choice in Japanese subsidiary’s exports and imports, we obtained useful information on what impedes the use of RBM and other Asian currencies for trade invoicing and whether the firms plan to increase 6 We thank RIETI for conducting the RIETI survey, “Questionnaire Survey on the Choice of an Invoice Currency by Japanese Overseas Subsidiaries.” In this survey, questionnaires were sent out to manufacturing subsidiaries mainly owned by Japanese firms. The sales subsidiaries and controlling office owned not by Japanese manufacturing firms but by sales companies or financial institutions were excluded from the questionnaire survey. 7 The main purpose of the RIETI Survey was to obtain information on invoice-currency choice and exchange risk management of Japanese overseas subsidiaries operating all over the world. However, in the present study, we focus on the invoice-currency choice of Japanese subsidiaries operating in Asia, especially in China.

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the use of RMB and other Asian currencies in the future.8 Although the sample set of firms that responded to the questionnaires has not been identical between the 2010 and 2014 RIETI Surveys, we can check the differences in results between the two surveys to discuss a possible increase in the use of Asian currencies. Table 1 presents the results of the 2014 RIETI Survey concerning the difficulties faced by Japanese subsidiaries in choosing invoice currency. Column (B) shows that the U.S. dollar is the most-used currency: 83.9% of firms (respondents) use the U.S. dollar in 2014. The yen is the second-most-used currency, accounting for 60.4% in 2014. RMB is the fourth-most-used currency: only 9.6% of sample firms use RMB in 2014. Due to space limitation, we do not present the results of the 2010 Survey in Table 1, but the results are almost the same between the 2010 and 2014 Surveys.9 Second, Table 1 also presents the currency Japanese subsidiaries have difficulty using for trade. Among the six problems from (D1) to (D6), “(D5) high foreign exchange rate volatility” accounts for the largest share in most currencies in 2014 RIETI Survey. The major reason for subsidiaries having difficulty in using RMB is “(D5) high foreign exchange rate volatility” in the 2014 Survey. Although not presented in Table 1, the main reason in the 2010 Survey is “(D1) foreign exchange controls/regulations.” Third, column (C) in Table 1 indicates that only 27.9% of Japanese subsidiaries have some difficulty in using RMB for trade transactions in the 2014 Survey, which is much smaller than that in the 2010 Survey, where 51% of Japanese subsidiaries in the 2010 Survey have some difficulty using the RMB.10 This result is consistent with the recent improvement in RMB foreign exchange transactions discussed in the previous section, as well as with a gradual shift of RMB’s exchange rate regime toward a more flexible one.11 2.3. Is There any plan to increase the use of RMB and other Asian currencies? Table 2-A presents the survey results of the question “Do you have any plan to increase RMB transactions in the future?” A few respondents (firms) answer “yes” in both the 2010 and 2014 Surveys, except for subsidiaries operating in Asia. The share of respondents that answer “yes” declines from 21.2% in the 2010 Survey to 15.9% in the 2014 survey. Table 2-B presents answers to the question from the 2014 Survey, “(B) Do you have any plan to expand RMB transactions in the future?” Columns (B1)–(B3) show that 53% and 25.6% of subsidiaries operating in China and Hong Kong, respectively, plan to increase RMB transactions in the future, reflecting growing use of RMB for receipts and payments indicated in columns (C1) and (C2). In contrast, only a few subsidiaries operating in other Asian countries consider further use of RMB for their international transactions. 2.4. Which RMB is used, CNY or CNH? In the 2014 RIETI Survey, we obtained information on the use of CNY and CNH. RMB is traded both onshore and offshore in China, and Chinese regulations divide the two markets. Since RMB traded outside of China is known as CNH and that traded onshore is CNY, there remains a discrepancy between the exchange rates of CNY and CNH. In this paper, we do not consider the difference in foreign exchange rates between CNY and CNH. Instead, we investigate whether and how CNH works as a hedging instrument of CNY for non-resident firms and whether CNH promotes RMB as an invoice currency for non-resident firms. Table 3 shows that only a few Japanese subsidiaries have RMB transactions in all regions except Asia. In Asia, 19.4% of respondents use RMB for their transactions, 85% of which use CNY instead of CNH. This evidence suggests that Japanese subsidiaries mainly use CNY for their operation. We also collected information on which RMB market Japanese subsidiaries use RMB in. Table 4-A shows that RMB is used mainly by Japanese subsidiaries located in Asia, 84.2% of which use RMB in China’s foreign exchange market. Only 13.3% of subsidiaries in Asia use the Hong Kong market, and the CNH-yen market in Tokyo is rarely used by Japanese subsidiaries. Table 4-B presents information on why CNH is not used. Only 21.9% of subsidiaries consider CNH useful in hedging CNY transactions, and two-thirds or more of subsidiaries do not use CNH because CNH cannot be used for trade settlements. Thus, we conclude that only one-fifth of Japanese subsidiaries use CNH for hedging purposes, while the remainder of subsidiaries are reluctant to use CNH for RMB transactions. 2.5. Difference in internationalization between yen and RMB As mentioned earlier, RMB internationalization started from trade-related transactions. During the first step of RMB internationalization, the Chinese government focused on promoting the use of RMB for trade settlement without its full convertibility. In their unique approach, the bilateral swap arrangements played an important role. As capital accounts are not fully liberalized in China and foreign countries cannot freely use RMB in international markets, one alternative approach toward increasing international flows of RMB is to sign bilateral swap agreements. In addition, the Chinese government promoted CNH for cross-border transactions including trade settlements, deposit, and direct investment. To make CNH transactions more convenient, they set up 8 Theoretically, invoice currency can differ from settlement currency (Friberg, 1998). According to the 2014 RIETI Survey, 95% of sample subsidiaries operating in Asian countries answered that invoice currency is generally the same as settlement currency. This evidence is consistent with the findings of Friberg and Wilander (2008). 9 The results of the 2010 Survey are presented in Sato and Shimizu (2016). 10 See Sato and Shimizu (2016) for the result of the 2010 Survey. 11 During the global financial crisis (2009–2011), RMB temporarily returned to the U.S. dollar peg system.

289

4 (11.1) 3 (12.0) 9 (8.5) 12 (21.4)

34 (64.2)

23 (18.1) 5 (27.8) 10 (35.7)

1266 (83.9) 527 (34.9) 924 (60.4) 147 (9.6) 63 (4.1)

36 (2.4) 25 (1.6) 106 (6.9) 56 (3.7)

53 (3.5)

127 (8.3) 18 (1.2) 28 (1.8)

U.S. Dollar

290 [25.0] [0.0] [0.0] [25.0]

0 [0.0] 0 [0.0] 0 [0.0]

5 [14.7]

1 0 0 3

22 [7.1] 5 [5.7] 15 [4.0] 12 [29.3] 0 [0.0]

(D1) Foreign exchange controls/regulations prevent non-residents' transactions of the currency

(D) Problems

[25.0] [0.0] [11.1] [16.7]

1 [4.3] 0 [0.0] 1 [10.0]

0 [0.0]

1 0 1 2

18 [6.2] 3 [3.8] 14 [3.7] 14 [34.1] 0 [0.0]

(D2) Foreign exchange controls/regulations prevent operational hedging (marry and netting)

[0.0] [0.0] [0.0] [16.7]

2 [8.7] 1 [20.0] 1 [10.0]

1 [2.9]

0 0 0 2

18 [6.2] 4 [5.0] 15 [4.0] 16 [39.0] 0 [0.0]

(D3) Capital controls/ restrictions prevent investment and fund-raising in that currency

3 [13.0] 0 [0.0] 2 [20.0]

5 [14.7]

0 [0.0] 1 (4.3) 0 [0.0] 1 [10.0]

18 [78.3] 4 [80.0] 6 [60.0]

(25.0) [0.0] (11.1) (8.3) 31 [91.2]

1 0 1 1

0 3 7 8

2 1 2 3

[0.0] [100.0] [77.8] [66.7]

13 (4.5) 3 (3.8) 8 (2.1) 1 (2.4) 0 [0.0]

247 [85.2] 70 [87.5] 357 [94.7] 26 [63.4] 3 [75.0] 53 [18.3] 11 [13.8] 51 [13.5] 10 [24.4] 1 [25.0] [50.0] [33.3] [22.2] [25.0]

(D6) Others (D5) High foreign exchange volatility

(D4) High transaction costs involved with currency hedging

Note: The total number of respondents (firms) is 1529. Figures in parenthesis for column (B) denote percentage figures based on the ratio of (B) to the total respondents (1529). Figures in parenthesis for column (C) denote percentage figures based on the ratio of (C) to (B). Figures in square brackets denote percentage figures based on the ratio of (D) to (C). Source: 2014 RIETI Survey.

Hong Kong Dollar Taiwan Dollar Korean Won Singapore Dollar Malaysian Ringgit Indonesia Rupiah Thai Baht Philippines Peso India Rupee

Chinese RMB

Japanese yen

Euro

311 (46.6) 87 (13.0) 377 (40.8) 41 (27.9) 4 (6.3)

(B) Currency firms use for trade transactions

(A) Name of Currency

(C) Currency firms have difficulty using for trade

Answers in 2014 (Multiple answers are allowed.)

Table 1 Problems Faced When Choosing Invoice Currency: Result for the 2014 Survey.

K. Sato, J. Shimizu

North American Journal of Economics and Finance 46 (2018) 286–301

North American Journal of Economics and Finance 46 (2018) 286–301

K. Sato, J. Shimizu

Table 2 Do You Have any Plan to Increase RMB Transactions in the Future? 2-A. Result for Major Regions 2010

2014

Number of respondents

Yes

No

Others

Number of respondents

Yes

No

Others

Asia

755

572 (75.8)

23 (3)

623

99 (15.9)

501 (80.4)

23 (3.7)

Oceania North America South America Europe (Euro area) Europe (nonEuro area) All

43 273 – 109

160 (21.2) 0 (0.0) 6 (2.2) – 3 (2.8)

43 (100.0) 262 (96.0) – 104 (95.4)

0 (0.0) 5 (1.8) – 2 (1.8)

44 204 20 121

0 3 0 7

43 (97.7) 196 (96.1) 20 (100.0) 112 (92.6)

1 5 0 2

70

0 (0.0)

70 (100.0)

0 (0.0)

70

1 (1.4)

66 (94.3)

3 (4.3)

1250

169 (13.5)

1051 (84.1)

30 (2.4)

1082

110 (10.2)

938 (86.7)

34 (3.1)

(0.0) (1.5) (0.0) (5.8)

(2.3) (2.5) (0.0) (1.7)

2-B. Result for the 2014 Survey for Asian Countries (B) Do you have any plan to expand RMB transactions in the future?

(C) If you answer “yes”, what is the reason? (Multiple answers are allowed.)

(A) Number of respondents

(B1) Yes

(B2) No

(B3) Others

(C1) Amount of RMB received has been increasing

(C2) Payments in RMB become more acceptable

(C3) RMB becomes easier to use with progression of China's currency reform

(C4) Others

All Countries

1082

938 (86.7)

34 (3.1)

66

41

21

16

China Hong Kong Taiwan Korea Singapore Malaysia Thailand Indonesia Philippines Vietnam India

151 39 46 22 62 65 85 73 17 29 29

110 (10.2) 80 (53.0) 10 (25.6) 2 (4.3) 0 (0.0) 3 (4.8) 1 (1.5) 0 (0.0) 0 (0.0) 1 (5.9) 2 (6.9) 0 (0.0)

63 26 42 21 56 64 82 72 16 26 28

8 3 2 1 3 0 3 1 0 1 1

52 6 0 0 1 0 0 0 0 2 0

24 7 0 0 1 1 0 0 1 1 0

11 3 1 0 2 0 0 0 0 1 0

13 0 1 0 1 0 0 0 0 0 0

(41.7) (66.7) (91.3) (95.5) (90.3) (98.5) (96.5) (98.6) (94.1) (89.7) (96.6)

(5.3) (7.7) (4.3) (4.5) (4.8) (0.0) (3.5) (1.4) (0.0) (3.4) (3.4)

Note: Figures in parentheses denote percentage of respondents for each answer in the total respondents. Source: 2010 and 2014 RIETI Surveys. Table 3 Do You have RMB Transactions? (Result for the 2014 Survey). Number of respondents

Asia Oceania North America South America Europe (Euro area) Europe (Non-Euro area) All

643 (100.0) 43 (100.0) 206 (100.0) 20 (100.0) 123 (100.0) 70 (100.0) 1105 (100.0)

If “yes”, which RMB?

Yes

125 (19.4) 1 (2.3) 7 (3.4) 0 (0.0) 5 (4.1) 2 (2.9) 140 (12.7)

No

CNY (On-shore RMB)

CNH (Off-shore RMB)

102 [85.0] 1 [100.0] 4 [57.1] 0 [0.0] 4 [100.0] 2 [100.0] 113 [84.3]

18 [15.0] 0 [0.0] 3 [42.9] 0 [0.0] 0 [0.0] 0 [0.0] 21 [15.7]

518 (80.6) 42 (97.7) 199 (96.6) 20 (100.0) 118 (95.9) 68 (97.1) 965 (87.3)

Note: Figures in parentheses denote percentage of respondents for each answer in the total number of respondents. Figures in square brackets denote proportion of the number of respondents that answered “yes.” Note that all respondents that answered “yes” did not answer to the question, “If ‘yes’, which RMB?” Source: 2014 RIETI Survey.

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Table 4 Use of CNY (Onshore RMB) and CNH (Offshore RMB). 4-A. If you have RMB transactions, in which foreign exchange market do you use RMB?

Asia Oceania North America South America Europe (Euro area) Europe (Non-Euro area) All

Number of respondents

Foreign exchange market in China

Foreign exchange market in Hong Kong

Offshore RMB-Yen market in Tokyo

Others

120 (100.0) 1 (100.0) 7 (100.0) 0 (0.0) 4 (100.0) 2 (100.0) 134 (100.0)

101 (84.2) 1 (100.0) 5 (71.4) 0 (0.0) 3 (75.0) 1 (50.0) 111 (82.8)

16 (13.3) 0 (0.0) 1 (14.3) 0 (0.0) 0 (0.0) 0 (0.0) 17 (12.7)

2 0 0 0 0 0 2

1 0 1 0 1 1 4

(1.7) (0.0) (0.0) (0.0) (0.0) (0.0) (1.5)

(0.8) (0.0) (14.3) (0.0) (25.0) (50.0) (3.0)

4-B. If you have RMB transactions, which is the most appropriate for the use of CNH?

Asia Oceania North America South America Europe (Euro area) Europe (NonEuro area) All

Number of respondents

CNH is useful in hedging CNY transactions.

Basically, we do not use CNH. But, in some cases, we use CNH due to the regulation on CNY transactions.

We do not use CNH because only CNY can be used for trade settlement.

Others

96 (100.0) 1 (100.0) 5 (100.0) 0 (0.0) 3 (100.0)

21 (21.9) 0 (0.0) 0 (0.0) 0 (0.0) 0 (0.0)

5 0 0 0 0

63 (65.6) 1 (100.0) 3 (60.0) 0 (0.0) 3 (100.0)

7 0 2 0 0

2 (100.0)

0 (0.0)

0 (0.0)

1 (50.0)

1 (50.0)

107 (100.0)

21 (19.6)

5 (4.7)

71 (66.4)

10 (9.3)

(5.2) (0.0) (0.0) (0.0) (0.0)

(7.3) (0.0) (40.0) (0.0) (0.0)

Note: The results are obtained from the 2014 Survey. Figures in parentheses denote percentage figures based on the proportion of the total number of respondents. Source: 2014 RIETI Survey.

official RMB clearing banks in 15 countries across the world. Let us briefly discuss the differences in the internationalization process between the yen and RMB.12 The yen became a fully convertible currency through the following deregulations: the establishment of Free Yen Accounts for nonresidents in 1960, the amendment of the Foreign Exchange and Foreign Trade Control Act in 1980, the abolition of the real demand principle and US-Japan Yen Dollar Committee in 1984, and the amendment of the Foreign Exchange and Foreign Trade Act in 1998.13 There are three marked differences between the yen and RMB internationalizations. First, the Japanese government started to deregulate the foreign exchange and capital controls to make the yen fully convertible. Second, as suggested by Eichengreen and Kawai (2014), Japan was reluctant to internationalize the yen for trade settlement during the 1980s and the first half of the 1990s when it increased exports to the world market, while the Chinese government aggressively and rapidly promoted RMB internationalization just after becoming the largest exporting country. When the Foreign Exchange and Foreign Trade Act in 1998 was amended in Japan to deregulate domestic and foreign capital transactions and foreign exchange operations, 14 years had passed since the abolition of the real demand principle in 1984. Although this amendment liberalized the settlements in foreign currencies, it was too late to internationalize the yen for trade invoicing. This is because the Japanese economy suffered from prolonged stagnation in the 1990s. Since the second half of the 1990s, Japan has tried to promote the use of the yen as an international currency, but the internationalization process has made little progress so far. Third, the Japanese government allowed a large appreciation of the yen from the Plaza Accord in 1985. However, they did not promote its use for trade settlements at that time. On the other hand, RMB internationalization started after the Chinese government changed their currency regime from the U.S. dollar peg to the managed floating system. Under the strong expectation of RMB appreciation, there should be strong incentive for foreign investors to hold RMB. As Eichengreen and Kawai (2014) indicated, RMB internationalization was supported by speculative motives rather than the convenience of RMB for trade invoicing and settlement. The use of the yen in trade transactions gradually increased its share until 1980s, but this share stopped rising and declined in the 1990s. There are various arguments and explanations regarding the limited use of the yen. The choice of invoice currency in international trade is usually affected by various factors such as market competitiveness (bargaining power) and trade structure. Japan used to import large amounts of raw materials that are traditionally invoiced in U.S. dollars in international markets. Even in the trade between Asian countries, the yen is not extensively used. First, the yen is not conveniently used because foreign exchange markets between the yen and Asian currencies remain underdeveloped. Second, the exchange rates between the yen and Asian currencies have remained unstable because most Asian currencies were linked more strongly to the U.S. dollar. The third factor

12 13

For a good survey of the yen internationalization, see Ito (1993), Kawai (1996), and Sato (1999). Details of these deregulation policies are presented in Kawai (1996), Nakakubo (1998) and Sato (1999).

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Table 5 Trade Pattern of Japanese Production Subsidiaries in Asia. 2010

2014

Source Country/ Region Breakdown

Number of Respondents

(a) Imports from Japan (%)

(b) Local Procurements (%)

(c) Imports from Others (%)

Number of Respondents

(a) Imports from Japan (%)

(b) Local Procurements (%)

(c) Imports from Others (%)

Asia China Hong Kong Taiwan Korea ASEAN-6 Other Asia

490 133 19 28 16 277 17

34.8 36.9 38.2 35.2 40.8 33.3 29.9

48.6 54.2 31.4 50.9 50.5 47.4 38.8

16.6 8.9 30.4 13.9 8.8 19.3 31.3

365 106 6 21 8 206 18

34.1 35.0 31.0 50.9 59.4 32.2 26.2

45.9 55.7 31.3 33.7 29.1 42.5 49.7

19.7 9.3 37.7 8.7 11.5 25.4 24.1

Exports and Sales Destination

Number of Respondents

(a) Exports to Japan (%)

(b) Local Sales (%)

(c) Exports to Others (%)

Number of Respondents

(a) Exports to Japan (%)

(b) Local Sales (%)

(c) Exports to Others (%)

Asia China Hong Kong Taiwan Korea ASEAN-6 Other Asia

492 135 19 28 16 276 18

28.0 36.4 42.8 14.8 30.6 25.4 6.8

47.9 49.1 26.2 54.7 58.1 44.7 91.2

24.1 14.5 31.0 30.5 11.3 29.9 2.1

342 96 6 20 8 197 15

26.0 31.7 31.7 17.6 4.5 26.0 10.8

50.3 52.6 23.2 55.5 91.3 46.1 72.6

23.7 15.7 45.2 27.0 4.3 27.9 16.6

Source: RIETI Questionnaire Survey 2010 and 2014.

is the declining credibility of the yen, which reflects the long stagnation of the Japanese economy that began in the 1990s. Furthermore, the inertia and institutional constraints in choosing a currency for international trade and capital transactions are often pointed out as possible reasons for the limited use of the yen. As explained above, the Chinese government has been pursuing a unique approach to RMB internationalization, learning from Japan’s failure to internationalize the yen. Indeed, the use of RMB has been growing, but Japanese firms are still reluctant to use CNH for their cross-border trade settlements. Japan made an effort to promote international use of the yen by removing capital controls and restrictions on yen transactions. In contrast, China has facilitated RMB internationalization and developed the CNH markets while keeping strict capital controls on the international use of CNY. As long as capital controls exist, Japanese firms do not assume that RMB is an international currency. Thus, a unique approach to RMB internationalization, in fact, prevents Japanese firms from using RMB despite the rapid growth of CNH markets. 3. Invoice currency choice in Japanese production subsidiaries 3.1. Data on invoice currency This paper uses firm-level data on the invoicing choice of Japanese overseas subsidiaries collected from a questionnaire survey conducted in 2010 and 2014. Through the questionnaire surveys, we obtained information on export (sales) and import (procurement) patterns of Japanese subsidiaries. We also collected information on which currency is used by Japanese subsidiaries in their local sales and procurements, in their exports to and imports from Japan, and in their exports to and imports from foreign countries (excluding Japan). More specifically, we obtained two types of unique data on the choice of invoice currency. First, we collected the share of invoice currency for each subsidiary’s exports and imports, which is firm-level invoicing data. Second, we obtained data not only on the choice of invoice currency for each product but also on the information on who is the trading partner, a group company (including the parent company) or another non-related company, for each product or intermediate input traded. This enabled us to distinguish the invoicing choice between intra-firm trade and arm’s length trade. This paper uses both share and product data of invoice currency choice to highlight the invoice-currency choice of Japanese subsidiaries. 3.2. Trade pattern Before discussing the use of invoice currency, let us observe the import (procurement) and export (sales) pattern of Japanese production subsidiaries in China and other Asian countries. Table 5 shows that one notable feature of this trade pattern is a relatively high share of trade with foreign countries including both Japan and other countries. In the 2014 Survey, for instance, 34.1% of intermediate inputs are imported from Japan, which is higher than the corresponding share of production subsidiaries in North

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Table 6 Share of Invoice Currency in Manufacturing Subsidiaries' Imports of Intermediate Inputs from Japan. Number of Respondents

(a) Yen (%)

(b) US Dollar (%)

(c) Euro (%)

(d) Renminbi (%)

(e) Local Currency (%)

(f) Others (%)

2014 Survey Asia China Hong Kong Taiwan Korea ASEAN-6 Other Asia

288 82 5 18 8 159 16

48.2 43.9 17.0 49.2 71.9 49.0 59.4

43.7 44.5 83.0 28.7 10.6 47.0 28.6

0.4 0.0 0.0 0.0 0.0 0.6 0.0

3.0 10.4 0.0 0.0 0.0 0.0 0.0

4.4 1.2 0.0 21.8 17.5 2.7 11.9

0.4 0.0 0.0 0.3 0.0 0.7 0.1

2010 Survey Asia China Hong Kong Taiwan Korea ASEAN-6 Other Asia

422 110 16 27 13 243 13

54.0 48.1 57.8 63.2 87.3 53.5 56.5

40.3 47.7 41.6 32.6 11.2 39.5 35.9

0.4 0.0 0.0 0.0 0.0 0.7 0.0

1.0 3.8 0.0 0.0 0.0 0.0 0.0

3.9 0.0 0.6 4.3 1.5 6.1 0.0

0.4 0.5 0.0 0.0 0.0 0.1 7.5

Table 7 Share of Invoice Currency in Manufacturing Subsidiaries’ Exports to Japan. Number of Respondents

(a) Yen (%)

(b) US Dollar (%)

(c) Euro (%)

(d) Renminbi (%)

(e) Local Currency (%)

(f) Others (%)

2014 Survey Asia China Hong Kong Taiwan Korea ASEAN-6 Other Asia

209 71 5 12 4 113 4

37.8 39.3 16.0 49.2 100.0 35.8 0.0

52.2 45.4 84.0 42.5 0.0 56.2 100.0

0.0 0.0 0.0 0.0 0.0 0.0 0.0

4.7 13.9 0.0 0.0 0.0 0.0 0.0

4.8 1.4 0.0 8.3 0.0 7.2 0.0

0.4 0.0 0.0 0.0 0.0 0.8 0.0

2010 Survey Asia China Hong Kong Taiwan Korea ASEAN-6 Other Asia

313 93 12 17 10 177 4

46.0 47.8 29.6 43.5 79.0 43.8 75.0

48.0 50.8 70.4 56.5 10.0 46.8 25.0

0.2 0.7 0.0 0.0 0.0 0.0 0.0

0.2 0.8 0.0 0.0 0.0 0.0 0.0

5.6 0.0 0.0 0.0 11.0 9.3 0.0

0.0 0.0 0.0 0.0 0.0 0.0 0.0

America and Europe.14 In addition, 49.7% of subsidiary production goods in Asia are exported to Japan and other countries. Although not presented in this paper, this exported-oriented sales pattern has not been observed in North America, where only 22.9% of subsidiary production goods are exported abroad.15 The import and export pattern has not changed from 2010 to 2014. 3.3. Share of invoice currency in Asia Using the share data of invoice currency, we show the extent to which RMB is used in Japanese production subsidiary’s operations in Asia. Our main interest is the subsidiaries’ choice of invoice currency, not in local procurements and sales but in imports from and exports to Japan and other foreign countries. Although tables and figures are not presented in this paper, local currency is mainly used in local procurements and sales. In China, the share of RMB transactions in local procurements has increased somewhat, from 60.8% in 2010 to 68.0% in 2014. In ASEAN, Taiwan, and Korea, the share of local currency invoicing declined, while that of U.S. dollar invoicing increased. The share of yen invoicing is lower than that of U.S. dollar invoicing in Asia. Although the share of RMB is quite high in China, RMB is rarely used in local procurements of other Asian countries. In local sales in 2014, the share of RMB transactions is 81.6% in China and that of local currency invoicing exceeds 70% in Korea and Taiwan. Again, RMB is not used at all in the local markets of Asian countries except China. Table 6 shows the choice of invoice currency of production subsidiaries in imports of intermediate inputs from Japan. More than 90% of subsidiary imports from Japan are invoiced in the yen or U.S. dollar. Subsidiaries in China increase the share of RMB 14 According to the 2014 Survey, 25.6% and 23.8% of intermediate inputs were imported from Japan in total imports of Japanese subsidiaries located in North America and Europe, respectively. The information on the trade pattern of Japanese subsidiaries in non-Asian countries is not reported in this paper. For details, see Ito et al. (2015a, 2015b). 15 See Ito et al. (2015a, 2015b) for further details.

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Table 8 Share of Invoice Currency in Manufacturing Subsidiaries’ Imports of Intermediate Inputs from Other Countries (excluding Japan). Number of Respondents

(a) Yen (%)

(b) US Dollar (%)

(c) Euro (%)

(d) Renminbi (%)

(e) Local Currency (%)

(f) Others (%)

2014 Survey Asia China Hong Kong Taiwan Korea ASEAN-6 Other Asia

205 34 5 8 4 141 13

6.8 8.9 0.0 8.8 12.5 6.1 9.0

80.4 84.2 82.0 79.4 87.5 80.7 64.5

4.2 2.9 0.0 11.9 0.0 4.1 6.4

0.7 3.6 2.0 0.0 0.0 0.0 0.0

4.5 0.0 16.0 0.0 0.0 5.3 7.7

3.4 0.3 0.0 0.0 0.0 3.8 12.5

2010 Survey Asia China Hong Kong Taiwan Korea ASEAN-6 Other Asia

282 49 12 12 5 191 13

6.1 4.0 12.8 1.5 16.0 6.6 1.1

79.0 77.5 68.6 94.8 74.2 79.4 74.8

5.6 11.9 0.3 0.4 9.8 4.3 8.2

1.0 3.8 4.6 0.0 0.0 0.1 0.4

4.9 0.5 13.8 1.7 0.0 5.6 7.7

3.5 2.2 0.1 1.7 0.0 4.0 7.8

Table 9 Share of Invoice Currency in Manufacturing Subsidiaries’ Exports to Other Countries (excluding Japan). Number of Respondents

(a) Yen (%)

(b) US Dollar (%)

(c) Euro (%)

(d) Renminbi (%)

(e) Local Currency (%)

(f) Others (%)

2014 Survey Asia China Hong Kong Taiwan Korea ASEAN-6 Other Asia

220 54 5 16 3 133 9

6.0 7.3 4.0 6.3 6.7 5.9 0.1

80.7 79.6 93.0 79.0 93.3 80.5 82.8

2.9 4.5 1.0 0.9 0.0 2.7 1.1

1.7 5.2 0.0 5.7 0.0 0.0 0.0

5.4 1.9 2.0 6.3 0.0 7.4 0.0

3.3 1.6 0.0 1.9 0.0 3.5 16.0

2010 Survey Asia China Hong Kong Taiwan Korea ASEAN-6 Other Asia

323 68 12 19 8 208 8

8.6 8.4 5.4 5.5 16.9 9.1 0.0

77.5 76.5 70.8 82.5 69.5 77.2 100.0

3.2 4.6 0.4 1.6 7.4 3.0 0.0

0.7 2.3 2.5 0.0 5.6 0.0 0.0

6.6 1.4 20.8 10.3 0.6 7.6 0.0

3.4 6.8 0.0 0.1 0.0 3.0 0.0

invoicing from 3.8% in 2010 to 10.4% in 2014, but the share of local currency invoicing in Taiwan and Korea is 21.8% and 17.5%, respectively, in 2014. This is higher than the corresponding share in China in imports of intermediate inputs from Japan. RMB is not used at all in other countries in imports from Japan. In subsidiary exports to Japan, the share of RMB in China-based subsidiaries’ exports increases from 0.8% in 2010 to 13.9% in 2014, which is higher than the share of local currency invoicing in other Asian countries (Table 7). However, 90% or more of Asiabased subsidiaries’ exports are invoiced in the yen or U.S. dollar in both 2010 and 2014. Note also that the share of U.S. dollar invoicing is, on average, higher than that of yen invoicing in exports of Asia-based subsidiaries to Japan. Table 8 indicates the share of invoice currency in production subsidiary imports from other countries (excluding Japan). In 2014, 80.4% of Asia-based subsidiary imports are invoiced in U.S. dollars, while the yen share is only 6.8%. The share of local currency invoicing is only 4.5% in 2014. RMB is used only by subsidiaries operating in China and Hong Kong, and the share of RMB is 3.6% and 2.0%, respectively. Finally, Table 9 shows that, according to the 2014 survey, the share of RMB in exports to other countries is only 5.2% in China, while 80.7% of exports in Asia are invoiced in U.S. dollars. Only Taiwan uses RMB in exports to other countries. As will be discussed, however, Taiwan’s RMB transactions are likely to be related to Taiwan’s exports to China. In Asia as a whole, the share of RMBinvoiced exports increases only slightly from 0.7% in 2010 to 1.7% in 2014.

3.4. Invoice currency choice in intra-firm trade In this section, we investigate the product (or transaction) level data on the choice of invoice currency, focusing on production subsidiaries in Asia (all Asian countries), China, and ASEAN-6 countries. The share (simple arithmetic average) of invoice currency in both imports and exports is calculated using the information on the number of transactions. 295

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Table 10 Invoice Currency Choice in Intra-Firm Trade: Trade with Japan. Imports from Japan (%)

Exports to Japan (%)

Location of Subsidiaries:

Location of Subsidiaries:

Asia 2010

China 2014

2010

ASEAN-6

Asia

China 2014

ASEAN-6

2014

2010

2014

2010

2010

2014

2010

2014

1. JPY 2. USD 3. Euro 4. Renminbi 5. Local 6. Others TOTAL (No. of Answers)

1. From Japanese Head Office 58.8 54.4 53.0 38.0 39.7 45.5 0.4 0.0 0.0 0.2 3.6 0.8 2.2 2.3 0.0 0.4 0.0 0.8 100.0 100.0 100.0 (498) (307) (132)

43.8 44.8 0.0 11.5 0.0 0.0 100.0 (96)

57.5 37.7 0.7 0.0 3.7 0.4 100.0 (268)

58.6 38.5 0.0 0.0 3.0 0.0 100.0 (169)

1. To Japanese Head Office 46.3 31.3 51.8 45.8 60.4 46.4 0.3 0.0 0.0 0.5 5.7 1.8 6.8 2.6 0.0 0.3 0.0 0.0 100.0 100.0 100.0 (369) (227) (112)

30.9 53.1 0.0 16.0 0.0 0.0 100.0 (81)

42.4 45.5 0.5 0.0 11.1 0.5 100.0 (198)

25.9 69.6 0.0 0.0 4.5 0.0 100.0 (112)

1. JPY 2. USD 3. Euro 4. Renminbi 5. Local 6. Others TOTAL (No. of Answers)

2. From Group Company 51.9 43.9 36.1 46.5 48.5 58.3 0.0 0.0 0.0 0.8 4.5 2.8 0.8 3.0 2.8 0.0 0.0 0.0 100.0 100.0 100.0 (129) (66) (36)

33.3 51.9 0.0 11.1 3.7 0.0 100.0 (27)

47.8 52.2 0.0 0.0 0.0 0.0 100.0 (69)

53.6 42.9 0.0 0.0 3.6 0.0 100.0 (28)

2. To Group Company 50.8 38.1 46.0 50.0 0.0 0.0 0.0 2.4 1.6 9.5 1.6 0.0 100.0 100.0 (63) (42)

45.5 54.5 0.0 0.0 0.0 0.0 100.0 (11)

41.2 47.1 0.0 5.9 5.9 0.0 100.0 (17)

44.7 50.0 0.0 0.0 2.6 2.6 100.0 (38)

37.5 50.0 0.0 0.0 12.5 0.0 100.0 (24)

1. JPY 2. USD 3. Euro 4. Renminbi 5. Local 6. Others TOTAL (No. of Answers)

3. From Japanese Sogo Shosha 56.9 54.5 41.5 38.7 40.0 53.7 0.0 0.0 0.0 1.5 2.7 4.9 2.9 2.7 0.0 0.0 0.0 0.0 100.0 100.0 100.0 (137) (110) (41)

61.5 26.9 0.0 11.5 0.0 0.0 100.0 (26)

59.5 35.7 0.0 0.0 4.8 0.0 100.0 (84)

47.9 47.9 0.0 0.0 4.2 0.0 100.0 (71)

3. To Japanese Sogo Shosha 8.3 64.3 33.3 91.7 28.6 66.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 7.1 0.0 0.0 0.0 0.0 100.0 100.0 100.0 (12) (14) (3)

100.0 0.0 0.0 0.0 0.0 0.0 100.0 (3)

0.0 100.0 0.0 0.0 0.0 0.0 100.0 (7)

55.6 33.3 0.0 0.0 11.1 0.0 100.0 (9)

1. JPY 2. USD 3. Euro 4. Renminbi 5. Local 6. Others TOTAL (No. of Answers)

4. From Others 53.4 52.0 32.8 44.0 0.0 0.0 3.4 0.0 6.9 4.0 3.4 0.0 100.0 100.0 (58) (25)

0.0 100.0 0.0 0.0 0.0 0.0 100.0 (2)

52.5 35.0 0.0 0.0 7.5 5.0 100.0 (40)

55.6 44.4 0.0 0.0 0.0 0.0 100.0 (18)

4. To Others 42.1 22.2 42.1 55.6 0.0 0.0 0.0 0.0 5.3 0.0 10.5 22.2 100.0 100.0 (19) (9)

0.0 100.0 0.0 0.0 0.0 0.0 100.0 (4)

50.0 33.3 0.0 0.0 8.3 8.3 100.0 (12)

40.0 20.0 0.0 0.0 0.0 40.0 100.0 (5)

44.4 33.3 0.0 22.2 0.0 0.0 100.0 (9)

40.0 60.0 0.0 0.0 0.0 0.0 100.0 (5)

Source: 2010 and 2014 RIETI Surveys.

Table 10 shows that when Japanese production subsidiaries in Asia trade with Japan, the major trading partner is their head offices. According to the 2014 Survey, about 60% of subsidiaries’ imports are from head offices, while 78% of their exports are to head offices.16 In addition, 90% or more of transactions are invoiced in either the yen or U.S. dollars, when Asia-based subsidiary imports from and exports to Japanese head offices. In subsidiary imports from Japanese head offices, the share of the yen is 58.8% in 2010 and 54.4% in 2014, while that of the U.S. dollar is 38.0% in 2010 and 39.7% in 2014. On the other hand, in subsidiary exports to Japanese head offices, the share of the U.S. dollar increases from 45.8% in 2010 to 60.4% in 2014. During the same period, the share of the yen declines from 46.3% to 31.3%. This pattern of invoice-currency choice can also be observed in subsidiaries operating in China and ASEAN-6. Even in subsidiary trade with Japanese group companies, we observed a similar pattern of invoice-currency choice, while the share of U.S. dollar-invoiced transactions is higher than that in subsidiary imports from group companies. Table 10 also shows that the share of RMB increases markedly to 11–12% in imports from Japanese head offices, group companies, and Sogo Shosha (large trading companies), whereas the number of transactions remains quite small in imports from group companies and Sogo Shosha. The table also indicates that the share of RMB invoicing in exports of subsidiaries in China to Japanese head offices rises considerably from 1.8% in 2010 to 16% in 2014. This observation suggests that in intra-firm trade between production subsidiaries in Chinese and Japanese head offices, RMB transactions have grown considerably. Table 11 presents the choice of invoice currency in subsidiary trade with foreign countries excluding Japan. First, Japanese subsidiaries in Asia tend to use the U.S. dollar for trade invoicing when they export to and import from other countries: around 80%

16

The share is calculated using the information on the number of answers (transactions) reported in Table 10.

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Table 11 Invoice Currency Choice in Intra-Firm Trade: Trade with Foreign Countries. Location of Subsidiaries: Asia 2010

1. 2. 3. 4. 5. 6.

JPY USD Euro Renminbi Local Others

TOTAL (No. of Answers)

Location of Subsidiaries:

China 2014

ASEAN-6

Asia

JPY USD Euro Renminbi Local Others

TOTAL (No. of Answers)

ASEAN-6

2010

2014

2010

2014

2010

2014

2010

2014

2010

2014

1. From Foreign Company 3.0 1.1 2.7 80.5 88.8 78.4 8.7 6.1 16.2 0.9 0.0 2.7 5.2 2.2 0.0 1.7 1.7 0.0

0.0 100.0 0.0 0.0 0.0 0.0

2.7 81.9 8.7 0.0 4.7 2.0

1.5 88.8 6.0 0.0 1.5 2.2

1. To Customers 7.3 9.6 82.9 86.0 1.6 0.0 1.6 0.0 4.7 3.7 2.1 0.7

20.0 70.0 0.0 6.7 0.0 3.3

18.8 81.3 0.0 0.0 0.0 0.0

3.9 87.4 2.4 0.0 3.9 2.4

7.4 85.2 0.0 0.0 6.2 1.2

100.0 (231)

100.0 (21)

100.0 (149)

100.0 (134)

100.0 (193)

100.0 (30)

100.0 (32)

100.0 (127)

100.0 (81)

100.0 (179)

100.0 (37)

2. From Group Company 1. 2. 3. 4. 5. 6.

China

100.0 (136)

2. To Group Company

7.2 80.3 2.6 0.0 2.6 7.2

3.4 85.3 4.3 0.9 1.7 4.3

4.5 77.3 9.1 0.0 4.5 4.5

0.0 93.1 3.4 3.4 0.0 0.0

6.3 80.2 1.0 0.0 3.1 9.4

5.4 82.4 5.4 0.0 1.4 5.4

6.0 77.2 4.3 1.3 7.3 3.9

5.0 75.7 5.7 3.6 7.1 2.9

3.5 78.9 5.3 5.3 3.5 3.5

0.0 72.7 11.4 11.4 2.3 2.3

8.1 74.3 4.1 0.0 9.5 4.1

6.4 78.2 3.8 0.0 9.0 2.6

100.0 (152)

100.0 (116)

100.0 (22)

100.0 (29)

100.0 (96)

100.0 (74)

100.0 (232)

100.0 (140)

100.0 (57)

100.0 (44)

100.0 (148)

100.0 (78)

0.0 91.7 0.0 0.0 0.0 8.3 100.0 (12)

0.0 85.7 0.0 14.3 0.0 0.0 100.0 (7)

0.0 84.2 0.0 0.0 15.8 0.0 100.0 (19)

0.0 95.5 4.5 0.0 0.0 0.0 100.0 (22)

3. To Distributors 1. JPY 2. USD 3. Euro 4. Renminbi 5. Local 6. Others TOTAL (No. of Answers)

– – – – – – – (–)

– – – – – – – (–)

– – – – – – – (–)

– – – – – – – (–)

– – – – – – – (–)

– – – – – – – (–)

3. From Others 1. 2. 3. 4. 5. 6.

JPY USD Euro Renminbi Local Others

TOTAL (No. of Answers)

0.0 88.4 0.0 0.0 9.3 2.3 100.0 (43)

2.8 88.9 2.8 5.6 0.0 0.0 100.0 (36)

4. To Others

2.4 80.0 4.7 0.0 4.7 8.2

2.3 88.6 0.0 6.8 0.0 2.3

0.0 83.3 11.1 0.0 0.0 5.6

16.7 33.3 0.0 50.0 0.0 0.0

3.2 79.4 1.6 0.0 6.3 9.5

0.0 96.8 0.0 0.0 0.0 3.2

11.8 64.7 0.0 0.0 0.0 23.5

0.0 100.0 0.0 0.0 0.0 0.0

0.0 0.0 0.0 0.0 0.0 0.0

0.0 100.0 0.0 0.0 0.0 0.0

18.2 72.7 0.0 0.0 0.0 9.1

0.0 100.0 0.0 0.0 0.0 0.0

100.0 (85)

100.0 (44)

100.0 (18)

100.0 (6)

100.0 (63)

100.0 (31)

100.0 (17)

100.0 (7)

100.0 (0)

100.0 (1)

100.0 (11)

100.0 (6)

Source: 2010 and 2014 RIETI Surveys.

or more of transactions are typically invoiced in U.S. dollars. When China-based subsidiaries import from foreign companies and export to customers in 2014, RMB is not used at all. However, in exports to group companies and distributors, China-based subsidiaries increase the share of U.S. dollars to 11.4% and 14.3%, respectively, in 2014. In ASEAN-6, Japanese subsidiaries do not use RMB for their exports and imports at all. Finally, Table 12 presents the destination breakdown of the invoice currency share in exports to other countries (excluding Japan). We consider the invoice currency choice of subsidiaries operating in Asia (all countries), Greater China (including mainland China, Hong Kong, and Taiwan), and ASEAN6 countries using the information obtained from the 2014 Survey. Note that about 74% of Japanese subsidiary exports to other countries were destined for other Asian countries.17 The U.S. dollar was largely used in exports to other Asian countries: 82.6% in exports of subsidiaries in Asia, 79.4% in Greater China, and 85.5% in ASEAN6 countries. RMB was marginally used only in exports of subsidiaries in Greater China, and was not extensively used in intra-Asian trade.

17

We computed this share by using the information on the number of answers (transactions) presented in Table 12.

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Table 12 Invoice Currency Share in Subsidiary Exports to Other Countries. Production Subsidiary's Exports to:

Number of transactions

Asia

Greater China

ASEAN6

Asia

Greater China

ASEAN6

0.0 93.3 0.0 3.3 3.3 0.0

0.0 94.1 0.0 5.9 0.0 0.0

0.0 91.7 0.0 0.0 8.3 0.0

0 28 0 1 1 0

0 16 0 1 0 0

0 11 0 0 1 0

1. To U.S.

1. 2. 3. 4. 5. 6.

TOTAL

100.0

100.0

100.0

30

17

12

2. To EU

1. 2. 3. 4. 5. 6.

4.5 59.1 36.4 0.0 0.0 0.0

11.1 33.3 55.6 0.0 0.0 0.0

0.0 70.0 30.0 0.0 0.0 0.0

1 13 8 0 0 0

1 3 5 0 0 0

0 7 3 0 0 0

TOTAL

100.0

100.0

100.0

22

9

10

1. 2. 3. 4. 5. 6.

0.0 86.7 6.7 0.0 0.0 6.7

0.0 100.0 0.0 0.0 0.0 0.0

0.0 75.0 12.5 0.0 0.0 12.5

0 13 1 0 0 1

0 3 0 0 0 0

0 6 1 0 0 1

TOTAL

100.0

100.0

100.0

15

3

8

1. 2. 3. 4. 5. 6.

8.2 82.6 0.0 2.6 4.6 2.1

7.9 79.4 0.0 7.9 3.2 1.6

7.3 85.5 0.0 0.0 5.6 1.6

16 161 0 5 9 4

5 50 0 5 2 1

9 106 0 0 7 2

100.0

100.0

100.0

195

63

124

3. To Others

4. To Asia

JPY USD Euro RMB Local Others

Share (%)

JPY USD Euro RMB Local Others

JPY USD Euro RMB Local Others

JPY USD Euro RMB Local Others

TOTAL

Note: The data obtained from the 2014 survey are presented here. Source: 2014 RIETI Survey.

4. What determines RMB-invoiced trade? 4.1. Empirical strategy We have so far found that RMB was chosen for invoice currency only by subsidiaries operating in China and Hong Kong, and especially in intra-firm trade with Japan. In this section, we report on an empirical analysis conducted to investigate possible determinants of RMB-invoiced trade by subsidiaries. In the following empirical analysis, we focus on the invoice-currency choice of Japanese subsidiaries operating in both Mainland China and Hong Kong.18 Previous studies such as Friberg (1998) and Bacchetta and van Wincoop (2005) theoretically showed that decisions regarding invoice currency are conditional on the degree of product differentiation and that of exchange rate volatility.19 These studies typically assume that an export firm has no corporate ties with an import firm, which is called “arm’s length trade.” As discussed in the previous section, however, Japanese subsidiaries have tended to conduct intra-firm trade in which both exporters and importers are in the same company or corporate group. This has resulted in exporters having little incentive to pass through exchange rate risks to importers in terms of consolidated accounting. In contrast to previous studies, we used, as possible determinants, the unique data on subsidiary exchange risk management obtained from the 2014 RIETI Survey. We conducted a Logit estimation to analyze the determinants of RMB invoicing, with the dependent variable being a binary variable that takes 1 if overseas subsidiaries use RMB for their trade transactions and 0 otherwise.20

In our result for 2014 Survey, most firms that used RMB for trade transactions were concentrated in China and Hong Kong. Refer to Bacchetta and van Wincoop (2005) to see whether the choice of the exporter’s currency, the importer’s currency, or the third currency was determined by the size of variance in exchange rate between two currencies. 20 We also tried Probit estimation and obtained very similar results. 18 19

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Table 13 Determinants of RMB-Invoiced Trade by Japanese Subsidiaries in Mainland China and Hong Kong. Dependent variable: RMBInvoiced Trade (Binary response variable). Explanatory Variables ln(Employment) D(Consolidated)

RMB (1)

RMB (2)

RMB (3)

0.063*** (0.018) 0.020 (0.071)

0.066*** (0.018) 0.010 (0.071) 0.087 (0.082) 0.099 (0.092) −0.080 (0.154) 0.270* (0.154)

−0.881** (0.434) 0.04 198

−1.162** (0.468) 0.06 198

0.055*** (0.019) 0.048 (0.071) 0.126 (0.085) 0.144 (0.093) −0.149 (0.153) 0.329** (0.167) 0.132* (0.069) −0.133 (0.094) 0.129 (0.083) 0.069 (0.095) −1.696*** (0.579) 0.11 182

D(Electric) D(Machinery) D(Transport) D(Trading) D(Discretionary) D(Operational) D(ERPT) D(Financial Hedging) Constant Pseudo R^2 Observations

Note: Results of Logit estimation are reported here. “D( )” denotes a dummy variable. Marginal effects are reported. Figures in parentheses are standard errors (*p < 0.10, **p < 0.05, ***p < 0.01).

Pr(RMB ) = β0 + β1ln(Employmenti ) + β2 D (Consolidated ) + β3 D (Electric ) + β6 D (Trading )

+ β4 D (Machinery ) + β5 D (Transport )

+ β7 D (Discretionary ) + β8 D (Operational) + β9 D (ERPT )

+ β10 D (Financial Hedging ) + εi

As an explanatory variable on the right-hand side, we first included the “size” of an overseas subsidiary i, measured by the number of employees of each sample subsidiary.21 Another possible determinant is the degree of capital ties between subsidiaries and their head offices. As we observed in the previous section, RMB-invoiced transactions were found in subsidiaries’ intra-firm trade with Japanese head offices and group companies. We used a consolidated subsidiary dummy, D(Consolidated), which takes 1 if an overseas subsidiary is a consolidated subsidiary of Japanese head offices and 0 otherwise.22 We next used three industry dummies, i.e., D(Electric) for the electrical machinery industry, D(Machinery) for the general machinery industry, and D(Transport) for the transport equipment industry, to consider the effect of product differentiation on invoicecurrency choice. Export products of these industries are typically considered differentiated products. We also included D(Trading) as a dummy variable for the trading company, because subsidiaries in China increased RMB-invoiced trade through trading companies (Sogo Shosha), especially in imports of China-based subsidiaries.23 Explanatory variables for exchange risk management were also included. We first included a dummy for discretionary management, D(Discretionary), which took a value of 1 if local subsidiaries were allowed by Japanese head offices to conduct discretionary management for foreign exchange risk, and 0 otherwise. Second, following Ito, Koibuchi, Sato, and Shimizu (2016), we included a dummy for operational hedging such as marry and netting, D(Operational), that took a value of 1 if a subsidiary used marry and netting, and 0 otherwise. A dummy variable for financial hedging, D(Financial Hedging), took a value of 1 if a firm used forward transactions, and 0 otherwise. A dummy variable for exchange rate pass-through, D(ERPT), took a value of 1 if a subsidiary followed a rule to pass through exchange rate fluctuations to importers in the local market, and 0 otherwise.24 Finally, ɛ denotes an error term. 4.2. Empirical results The estimated results are summarized in Table 13, where marginal effect is reported. First, the number of employees is 21

We also tried to include the subsidiaries’ total amount of sales, but the coefficient was not statistically significant. We also obtained information on the ownership ratio held by their Japanese equity owners; however, most subsidiaries in China answered that their ownership ratio was 100%. Thus, we could not use this information for empirical analysis. 23 See, for instance, Table 10 shows that RMB-invoiced imports of China-based subsidiaries from Japan through trading companies (Sogo Shosha) increased from 4.9% in 2010 to 11.5% in 2014. 24 For the pass-through dummy, we used the answer of a rule to reflect foreign exchange rate fluctuations in exporting prices for production plant and sales bases with the production plant, and a rule to reflect foreign exchange rate fluctuations in selling prices in the local market for the sales base. 22

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significantly positive at the 1% significance level, which strongly indicates that overseas subsidiaries that have a large number of employees tend to use RMB for their trade transactions. The coefficient of the consolidated subsidiary dummy is positive but not statistically significant, which suggests that the degree of capital relation between subsidiaries and head offices will not increase subsidiary choices of RMB for trade. We included industry dummies to consider the possible effects of product differentiation on the choice of RMB trade, but the coefficients of industry dummies were not statistically significant. This result suggests that RMB-invoiced trade is not affected by the degree of product differentiation in subsidiary export goods. In contrast, the dummy for trading companies is significantly positive at least at the 10% level, which indicates that Japanese subsidiaries operating in Mainland China and Hong Kong increased RMBinvoiced exports if they traded through trading companies. For dummy variables related to exchange-rate risk management, the discretionally risk management dummy was significantly positive at the 10% level, which suggests that Japanese overseas subsidiaries that discretionally conducted exchange risk management tended to use RMB for their trade transactions. However, other dummies for hedging instruments, i.e., the operational hedging, exchange rate pass-through, and financial hedging dummies, were not statistically significant. Thus, we have confirmed that the following three factors determine the RMB-invoiced trade by Japanese subsidiaries in Mainland China and Hong Kong. First, subsidiaries that employ many local workers tend to use RMB for their trade transactions. The larger the local labor costs, the more likely the subsidiaries are to increase local-currency transactions, which is a rational behavior for local subsidiaries to offset their revenues and expenditures by the same currency. Second, subsidiaries that can discretionally manage their exchange rate risk tend to use RMB for their trade transactions. Although an individual hedging instrument does not affect RMB-invoiced trade significantly, the subsidiary’s discretionary decision of risk management itself is an important factor in subsidiaries’ choice of RMB for their trade invoicing in Mainland China and Hong Kong. Third, subsidiaries’ trade with trading companies (Sogo Shosha) plays an important role in promoting RMB invoicing for trade transactions. By utilizing their own global distribution and sales network, trading companies can handle various currencies and minimize exchange rate risk. Thus, efficient exchange risk management is necessary for the use of RMB for international trade transactions. Finally, product differentiation, which is typically considered one of the main determinants of invoice-currency choice, does not significantly affect the choice of RMB by Japanese overseas subsidiaries in Mainland China and Hong Kong. This finding is consistent with those in the previous section, showing that RMB-invoiced transactions have grown in intra-firm trade between production subsidiaries in China and Japanese head offices. There is typically an internal rule to share profits and losses arising from exchange rate fluctuations between subsidiaries and head offices, in which case conventional determinants of invoice currency are unlikely to affect the choice of RMB. 5. Concluding remarks The international use of RMB for trade invoicing has been under scrutiny recently. However, firm-level information on RMB transactions, especially along production chains, has not been investigated in previous studies. A major reason for this lack is the difficulty in collecting data on firms’ pricing behavior and their choice of invoice currency. Since China plays the role of a regional and global manufacturing hub, where foreign MNCs operate actively, it is necessary to investigate the extent to which foreign MNCs use RMB for trade invoicing, especially in their intra-firm trade. Utilizing the firm-level information obtained by large-scale questionnaire surveys, this study has presented new evidence for the use of RMB by Japanese subsidiaries operating in China and other Asian countries along their regional and global production network. We found that, although RMB is largely used for local sales and procurements in China, Japanese subsidiaries mainly use the U.S. dollar, and to a lesser extent, the yen in trade with other countries. We also observed the growing use of RMB in subsidiary trade with Japan along production chains, especially in intra-firm trade. Specifically, production subsidiaries in China exhibit an increase in RMB transactions not only for imports of intermediate inputs from Japanese head offices and group companies but also for exports of production goods to Japanese head offices. We also conducted a Logit estimation to examine the determinants of RMB-invoiced trade by Japanese subsidiaries operating in Mainland China and Hong Kong. We found that the size of subsidiaries measured by employment of local workers positively affects the choice of RMB. Subsidiaries’ discretionary management for exchange rate risk is another important factor in enhancing RMBinvoiced trade. Since Japanese subsidiaries in China tend to conduct intra-firm trade, the degree of product differentiation, which is one of the major determinants in the literature, is unlikely to increase RMB-invoiced trade. Our empirical result implies that RMB transactions will grow further if overseas subsidiaries have more discretion in exchange rate risk management. However, as shown in Table 4, Japanese subsidiaries are reluctant to use CNH, even though it is a useful hedging instrument. CNH has developed rapidly due to the strict capital controls on CNY, which differs from yen internationalization. Japan made efforts to remove capital controls and restrictions on yen transactions for the purpose of facilitating yen internationalization. For further use of RMB, removing capital controls on CNY is necessary. References Bacchetta, P., & van Wincoop, E. (2005). A theory of the currency denomination of international trade. Journal of International Economics, 67(2), 295–319. Eichengreen, B., & Kawai, M. (2014). Issues for renminbi internationalization: An overview, ADBI Working Paper Series No. 454.

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Friberg, R. (1998). In which currency should exporters set their prices? Journal of International Economics, 45(1), 59–76. Friberg, R., & Wilander, F. (2008). The currency denomination of exports-A questionnaire study. Journal of International Economics, 75(1), 54–69. Ito, T. (1993). The Yen and the International Monetary System. In C. F. Bergsten, & M. Noland (Eds.). Pacific dynamism and the international economic system (pp. 299– 322). Washington, D.C.: Institute of International Economics. Ito, T. (2017). A new financial order in Asia: Will a RMB bloc emerge? Journal of International Money and Finance, 74, 232–257. Ito, T., Koibuchi, S., Sato, K., & Shimizu, J. (2016). Exchange rate exposure and risk management: The case of Japanese exporting firms. Journal of the Japanese and International Economies, 41, 17–29. Ito, T., Koibuchi, S., Sato, K., & Shimizu, J. (2015). Exchange risk management and the choice of invoice currency: 2014 questionnaire survey of Japanese overseas subsidiaries, RIETI Discussion Paper Series, 15-J-054 (in Japanese). Ito, T., Koibuchi, S., Sato, K., & Shimizu, J. (2015). Choice of invoice currency in global production and sales networks: The case of Japanese overseas subsidiaries, RIETI Discussion Paper Series, 15-E-080. Kawai, M. (1996). The Japanese yen as an international currency: Performance and prospects. In R. Sato, R. Ramachandran, & H. Hori (Eds.). Organization, performance, and equity: Perspectives on the Japanese economy (pp. 305–355). Massachusetts: Kluwer Academic Publishers. Nakakubo, F. (1998). Revision of the foreign exchange law and the possibility of capital outflow (http://www.nli-research.co.jp/english/economics/1998/eco9808a. pdf). Sato, K. (1999). The international use of the Japanese yen: The case of Japan’s trade with East Asia. The World Economy, 22(4), 547–584. Xu, Q., & He, F. (2015). The influence of RMB internationalization on the Chinese economy: Theory and policy. CIGI Papers, No.58Centre for International Governance Innovation.

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