The future of offshore and onshore RMB

Author: Ashley Lee | Published: 23 Apr 2013
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· While China intends to internationalise the renminbi by 2015, it has not yet opened its capital account;

· Onshore renminbi (CNY) and offshore renminbi (CNH) are still different markets, and onshore renminbi is still tightly controlled;

· Hong Kong is considered a testing ground for renminbi internationalisation;

· 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 prominence.

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 facilities.

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 guided development.

"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 different.

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."

Reserve currency

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 currency.

But a 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 BIS’ criteria.

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 remain.

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 employers.

Related links

What’s next for China’s offshore RMB market

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