7
used in Thailand’s trade during 1993 and
2011, and the other on the invoicing
shares of the Euro for 35 countries.
Using the experience of the Euro as a
benchmark, they predict the expected invoicing shares of RMB
today and conclude that the RMB has been significantly under-
used in trade invoicing.
Prof. Lai attributes the under-use to the lack of thick market
externalities associated with RMB use in international trade. He
urges China to relax its capital controls, allow full convertibility
of the RMB, and reform its financial sector much more deeply in
order for the offshore RMB market to help the RMB become a
major invoicing currency.
Reference:
Edwin L.-C. Lai and Xiangrong Yu (2014), “Invoicing Currency
in International Trade: An Empirical Investigation and Some
Implications for the Renminbi”, forthcoming in World Economy
Many serious discussions have been generated by the Chinese
government’s aspiration to internationalize the RMB. In an HKUST
IEMS academic seminar,
Edwin Lai
, Professor of Economics,
HKUST, offered his views on the RMB’s potential to become an
international currency in the Asian-Pacific region.
Ch i na ha s t a k en a s e r i e s o f s t ep s t o p romo t e RMB
internationalization since 2008, and newspaper headlines report
a huge volume of trade deals settled in the currency. However,
few reports describe the extent of the RMB’s use as an invoicing
currency, not just a settlement currency. Prof. Lai pointed out
that invoicing in RMB requires greater commitment from trade
partners and enables firms operating in China to effectively
hedge against exchange rate risks. Trade data suggest that only
a small fraction of China’s trade with foreign countries is invoiced
in RMB.
Prof. Lai and co-authors develop a model which shows that
there is a convex relationship between the invoicing share of a
currency and the economic size of the issuing country. Invoicing
decisions also depend upon thick market externalities, which
refers to the phenomenon that use of a currency by some
firms makes it more attractive to be used by other firms. Such
externalities are influenced by the degree of convertibility of the
currency, the degree of capital account openness and financial
market maturity of the issuing country.
They provide empirical support for their argument by analyzing
two data sets: one on the invoicing shares of eleven currencies
THE POTENTIAL OF THE RMB TO BE A MAJOR INVOICING
CURRENCY IN THE ASIAN-PACIFIC REGION
HKUST IEMS Academic Seminar (2014. 05.12)
The presentation slides as well as
the related paper are available at
The finding contributes to a better
u n d e r s t a n d i n g o f c o n t r a c t i n g
arrangements of firms in different
institutional settings. Compared to prior
research mainly on market-based economies such as the U.S.,
Prof Hung’s study reveals the value of political ties and market
credibility in a relationship-based economy that has institutional
characteristics similar to other emerging economies.
Reference:
Mingyi Hung, TJ Wong and Fang Zhang (2014), "The value of
political ties versus market credibility: Evidence from corporate
scandals in China", conditionally accepted at Contemporary
Accounting Research
Corporate scandals can be devastating. They not only cause
huge losses of market value to firms but also can trigger panic
and market instability, thus attracting great attention from
investors and regulators. In China, corporate scandals have
different levels of negative impact on firms’ value, depending
on the nature of the scandal, as discovered by
Mingyi Hung
,
Professor of Accounting, HKUST, in her research on corporate
scandals in Chinese firms. At a HKUST IEMS Academic Seminar,
she talked about how political scandals trigger worse market
reactions than market scandals.
The finding comes from an analysis of 212 enforcement
actions against corporate misconduct by Chinese courts and
securities regulators from 1997-2005. Prof. Hung and co-
authors categorized scandals into political scandals, market
scandals and mixed scandals, depending on whether the
scandal is primarily associated with the destruction of
political ties, market credibility, or both. Out of the 212
cases, they identified 26 political scandals such as managers
bribing government officials or stealing from the state
through tax evasion, 91 market scandals such as financial
misrepresentation and managers misappropriating firm
assets through embezzlement or kickbacks, and 95 mixed
scandals, such as embezzlement by managers of state-
owned enterprises (SOEs). They then employed an event
study methodology to test how the market reacts to these
different types of corporate scandals, as measured by the
firms’ cumulative abnormal returns (CARs), calculated as stock
returns minus returns of the market index during a certain
event window. The results suggested the value of a firm’s
political ties is greater than a firm’s market credibility. They
also found that compared to market scandals, political and
mixed scandals are more likely to lead to greater departure of
political and affiliated directors and larger decreases in loans
from state-owned banks.
THE VALUE OF POLITICAL TIES AND MARKET CREDIBILITY:
EVIDENCE FROM CORPORATE SCANDALS IN CHINA
HKUST IEMS Academic Seminar (2014. 03.03)
Characteristics-adjusted abnormal returns (CSARs) for different
types of scandals
Edwin Lai
Mingyi Hung
MONTHS SINCE SCANDAL
