China has approached the internationalisation of the Renminbi (RMB) by taking cautious but deliberate steps towards a more liberalised economy. The intent to internationalise the currency is clearly expressed in China’s five year plan and further endorsed by the 18th Plenum in 2013. However the pathways, sequencing and timing of internationalisation are the subject of considerable debate.

International trade links are well developed with China now the largest trading nation and set to be the largest global economy by the end of the decade. However financial links are still limited and the development of these links is essential for the internationalisation of the RMB. Therefore, with China’s current account largely liberalised but its capital account still subject to widespread capital controls, RMB trade invoicing is very important for the development of offshore RMB business. However, despite the rapid growth in RMB invoicing from zero in 2009 to over 20% of China’s total foreign trade by the end of 2013 (see Chart 1) there is still a substantial gap between trade with China and settlement in RMB. Ito and Chinn (2013) find that the RMB is underrepresented as an invoicing currency (relative to peers) even after controlling for capital account restrictions. It is therefore essential to understand the potential for a currency to be used in invoicing in order to measure its ability to become an investment or a reserve currency.