While China intends to internationalise the renminbi by
2015, it has not yet opened its capital
Onshore renminbi (CNY) and offshore renminbi (CNH) are
still different markets, and onshore renminbi is still tightly
Hong Kong is considered a testing ground for renminbi
Although China aims for the renminbi to be included in
the IMF’s Special Drawing Rights basket by the end
of 2015 following its review, it may continue imposing some
capital controls on its onshore currency.
The internationalisation of the renminbi (RMB) is one of the
hottest topics in finance today. Although internationalisation
might occur by 2015, market participants must consider the
difference between onshore and offshore renminbi.
Speaking at the Inter-Pacific Bar Association’s
(IPBA) annual meeting and conference last week in Seoul,
panelists agreed that the RMB is seeing increasing global
This year Taiwan and Singapore become offshore trading
centres with direct clearing in RMB, while China has
established direct swap agreements with Brazil and Australia.
The UK and France are also pushing for their own swap
It is unclear whether China will open its capital account by
2015. Although CNH and CNY exchange rates have tightened, its
onshore and offshore currencies remain separate markets.
Dr. Tae-hwan Rhee of thinktank Samsung Economic Research
Institute noted that China was pushed to the forefront of
global markets too early, and its role in growth became too
important too fast after 2008.
He added although that China is the second-largest economy
in the world, it comes 100 out of 200 countries in terms of per
capita gross domestic product (GDP) according to Oxford
Economics. It’s in the early stages of its
development, he said.
Further, he compared China’s markets to those
in Korea in the 1960s and 1970s, in which state-owned banks
"At this stage, this strategy was effective –
it’s not necessarily bad or good, but
it’s working," he said.
But he added that China does not have a clear incentive to
further develop its domestic financial markets. While the
development of the offshore RMB market is pushed by economic
growth and world trade, the domestic market is driven by
government-led investment plans in which the state-owned banks
lend to local companies.
Therefore offshore and onshore renminbi remain very
Rebecca Smith, co-head of issuer and client services at the
Hong Kong stock exchange (HKEx), said that China has proceeded
cautiously with promoting renminbi outside China, with a clear
distinction between onshore and onshore renminbi.
Onshore renminbi is carefully controlled, she said.
Offshore, the currency is building up in different geographies
but is not being remitted back into China much because
there are not many channels at this point.
However the onshore and offshore bond markets are very
active, she added. Dim sum bond issuances have gone through the
roof in the last five years, with many companies issuing
offshore renminbi bonds. She noted that the market is very
active and growing sharply.
Further, she added that when retail investors in China are
allowed to invest directly into Hong Kong, their preference
will of course be to use RMB. "We’ve taken the
view that this is the future," she commented.
She predicted that the offshore renminbi market will
continue to grow. China’s policy is to
internationalise the renminbi, she said, and some of its
January policy decisions were in that direction.
But she added, "As with anything else, China will proceed
very cautiously, so this is a wait and see situation."
Rhee agreed, adding that China will look to what happens in
Hong Kong and other offshore markets to determine the
development of the offshore renminbi market.
"If it approves of the developments, it will move further,"
he said. "However if the developments aren’t
favourable, the connection between onshore and offshore markets
may become even more clearly cut."
It is widely known that China’s goal is for the
CNY to be included in the International Monetary
Fund’s (IMF's) special drawing rights basket by
the end of 2015 when the IMF reviews its basket. The timing
might prove especially advantageous as the ongoing euro crisis
highlights the instability of the currency; investors as well
as the IMF may be looking for an alternative reserve
2011 report by the Royal Bank of Scotland noted that the
CNY falls short of more than half of the seven criteria
established by the Bank for International Settlements. However
only two currencies, the US dollar and the euro, meet all of
Although China is establishing more direct clearing lines
with banks in global financial centres, People’s
Bank of China chief Zhou Xiaochuan
clarified in December that the CNY’s capital
account convertibility does not necessarily mean 100%
convertibility or a free-floating currency. He added that
existing filing procedures related to cross-border financial
transactions, financial supervision and capital controls may
But Rhee noted that internationalising too quickly would
come with its own risks.
Any government in the long run wants its currency to be a
reserve currency as that would mean ultimate control of its
sovereign debt problems, he said. For example, the US can print
its money and pay back debt.
"To be accepted as a reserve currency, a country must open
up its financial market and take several steps, which would be
costly to China if it happened too fast," he said. "However the
renminbi may be a reserve currency in the long run."
The views expressed in the panel are the
speakers’ personal views, not the views of their
What’s next for China’s
offshore RMB market
China outbound M&A to enter new phase
More FDI opportunities in China’s