China's Cross-border Trade Settlement in Yuan: Theoretical Analysis and Policy Suggestion

This paper analyzes China's cross-border trade yuan settlement theoretically. In the view of firm's profit maximization, it adopts a partial-equilibrium model to analyze firm's decision about producer currency pricing (pricing in the exporter's currency) or local currency pricing (pricing in the importer's currency). When more of export commodities are differentiated with less price elasticity of substitution it is more profitable to make producer currency pricing. So, policy making should be concerned with optimization of trade structure in the long run. Chinese exporters can have more bargaining power with importers about the choice of invoicing currency when they export more differentiated products and China's cross-border trade yuan settlement can be largely expanded in the long run through this way.