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Offshore markets spur RMB to go global

Author  :  Chen Yejun     Source  :    Chinese Social Sciences Today     2014-07-31

Internationalization of the renminbi (RMB) took a giant leap forward in the first half of this year following booming offshore RMB-denominated business, growing cross-border RMB investment and capital flow, and net increases in the issuance of RMB bonds, the Bank of China (Hong Kong) said in a report released on July 11.

The findings were supported by Chen Yulu, president of Renmin University of China (RUC), at the 2014 International Monetary Forum and press conference of the Annual Report on the Internationalization of Renminbi in Beijing on July 20.

Presenting latest research findings into RMB internationalization achieved by the International Monetary Institute (IMI) at RUC, Chen claimed the internationalization of the RMB was “inseparable from the building of offshore markets.”

“The RMB is on track to become the third-largest international currency behind the US dollar and the euro within three years, five years at most,” said Chen, noting the rising RMB internationalization index is owed to rapid development of offshore financial markets that have further strengthened the international appeal of China’s currency.

Chen hailed the establishment of offshore RMB markets as rewarding in several ways. First, they can guide and influence behavior of market entities and advance liberalization of interest and exchange rates, thus creating favorable market conditions for the convertibility of RMB capital accounts.

Offshore RMB markets can also promote interest and exchange rates of the currency to better play their roles as “invisible hands,” narrowing the space for arbitrage both at home and abroad and reducing monetary risks.

In addition, offshore markets can also enlarge exports of the RMB, boost international demands for the currency, and shore up the confidence of overseas economic entities with RMB holdings.

“Establishing offshore markets can facilitate the RMB to serve three major functions: international settlement, international reserve and international investment,” added Wu Jun, a professor at the School of Banking and Finance at the University of International Business and Economics.

“As major international financial metropolises are competing for offshore RMB business, we should make full use of the opportunity to arrange offshore RMB markets globally in reasonable fashion,” said Chen.

Taking into consideration influencing factors including trade, investment, geopolitics, culture and institutional improvement, the research team at IMI adopted the analytic hierarchy process method and defined Hong Kong, Switzerland, Costa Rica and Mauritius as prime locations to set up offshore RMB markets in Asia, Europe, the Americas and Africa respectively.

Hong Kong was found to be the best choice of all, which prompted calls to step up efforts to remove institutional roadblocks hindering development of offshore RMB business in the Special Administrative Region to cement its status as an international offshore RMB financial center.

“Nonetheless, building of offshore RMB markets still lags behind China’s economic growth, so offshore markets should be deployed reasonably across the globe to catch up with, for example, the development of the Silk Road Economic Belt and the Maritime Silk Road,” noted Tu Yonghong, IMI deputy director.

Chen stressed that two relationships should be handled properly while promoting RMB internationalization by means of offshore markets.

In the short term, the relationship between offshore markets and their economies should be prioritized. In the medium and long terms, differences between onshore and offshore RMB markets should be addressed to realize the guiding role of market prices in offshore business.

The report also highlighted challenges ahead in offshore RMB market establishment, including the shortage of effective, safe and low-cost offshore RMB clearing systems and the absence of a legal framework.

From Wu’s standpoint, there are two major obstacles hindering the establishment of offshore RMB markets.

The first is posed by monetary factors. Wu referred to the “Triffin Dilemma,” indicating the decade-old imbalance of payments surplus has made RMB outflow extremely difficult. Achieving a large monetary capital scale is therefore no easy task.

The second obstacles are institutional roadblocks. Internationalization of the RMB and the building of offshore markets will be seriously constrained until China liberalizes interest rates, fully opens capital accounts and matures its exchange rate formation mechanism, Wu said.

 

 

The Chinese version appeared in Chinese Social Sciences Today, No. 624, July 23, 2014.

The Chinese link: http://sscp.cssn.cn/xkpd/zxtj/201407/t20140723_1264203.html

 

 

  Translated by Chen Mirong

  Revised by Tom Fearon

Editor: Chen Meina

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