The Offshore Renminbi: The Rise of the Chinese Currency and
its Global Future, Robert Minikin and Kelvin Lau; John Wiley &
Sons Singapore Pte. Ltd., 2013. Price: US $49.95.
During the previous two decades, world witnessed considerable
increase in China’s share in the global merchandise trade and global
output. It maintained a huge surplus in its current account on sustained
basis, while during the same period some advanced economies, in
particular, the US, maintained higher deficit. This led to consistent
pressures on China from global stakeholders to increase flexibility in
its currency management regime and sharing the burden of adjustment
of the global financial imbalances. In addition, there was consistent
demand from global investors community for access to more and
more Chinese currency denominated assets. Along with above two, a
geo-political debate for a multi-polar world order is going on, where
China is expected to play a more proactive role, particularly among the
emerging market and developing economies.
Amidst above background, in order to reform its currency regime
without losing control in the domestic market, the Chinese authorities
took initiatives to internationalise Chinese currency in a controlled
manner. In a unique experiment in purely Chinese style, they allowed
free deliverability of renminbi in the offshore market, while maintaining
policy determined exchange rate regime in the onshore market. Due
to its ‘one country two systems’ administrative structure, Hong Kong
emerged as a natural hub for the global trading and clearing of the
offshore renminbi. Here, it may be noted that at present, Hong Kong
operates as a special administrative region of the People’s Republic
of China and enjoys a high degree of autonomy in all matters except
for external affairs and defense. Chinese and Hong Kong Special
Administrative Region authorities exploited this unique dual status of
Hong Kong for internationalisation of the Chinese renminbi.
In order to support internationalisation of Chinese currency,
authorities encouraged invoicing of international trade in renminbi. As
China has imposed strict curbs on capital account of balance of payments,
for development and maintaining of adequate liquidity in the offshore
renminbi market, the People’s Bank of China (PBC) has sought to
promote RMB trade settlement by signing bilateral local currency swap
agreements with 19 Central Banks – including the Bank of China, Hong
Kong (BOCHK) – with a key objective to provide market participants
confidence that liquidity in the offshore RMB market will be sufficient
to meet RMB denominated payment obligations. Activation of these
agreements resulted in the PBC depositing RMB into the foreign central
bank’s account at the PBC in exchange for the foreign central bank
depositing their local currency into the PBC’s account at the foreign
central bank. The BOCHK provides clearing service between the
onshore and offshore markets. It is permitted to undertake cross-border
transactions subject to specified controls and functions as a clearing
bank for offshore renminbi.
Chinese authorities permitted Hong Kong based commercial banks
to accept deposits and lend advances denominated in renminbi. They
also permitted floatation of the offshore renminbi denominated bonds.
In addition to Hong Kong, subsequently the Chinese authorities signed
memorandum of understanding with financial authorities in London
and New York for issuance of renminbi denominated bonds. Since
the exchange rate of onshore renminbi is policy determined and that
of the offshore renminbi is determined purely by the market forces,
differences in offshore and onshore exchange rates arose, which led to
assigning of CNH symbol to the offshore renminbi. Assigning a new
symbol RMB-CNH for offshore renminbi, symbolises an important
step towards internationalisation of Chinese official currency.
A recent book titled as “The Offshore Renminbi: The Rise of
Chinese Currency and Its Global Future” written by Robert Minikin
and Kelvin Lau, dissects various facets of the offshore renminbi such
as its micro-structure, policy rationale, global linkage, impact on the
onshore renminbi and future consequences for Hong Kong and its financial markets, etc. in a lucid manner. At the broader level, this book
has attempted to answer some important questions such as (i) how the
offshore renminbi is different than other currencies or why we never
discuss about offshore US dollar?, (ii) what are the developments
related to international use of the offshore renminbi so far and its future
prospects?, (iii) what are the investment and hedging opportunities
in the new market created by renminbi internationalisation project?
and finally last but not the least it examines (iv) what would be the
consequences of internationalisation of renminbi and opening of
Chinese onshore financial system for the financial system of Hong
Kong? Under above broader framework, the book is divided in seven
chapters. The first Chapter, the New Global Role of Chinese Renminbi
sets the background and context of the book.
According to the authors, the Chinese authorities who hitherto were
taking baby-steps for internationalisation of renminbi took a ‘Big Bang’
decision in that direction in July 2010, by launching sale of the offshore
renminbi (i.e., RMB-CNH) denominated Chinese government bonds in
Hong Kong. Rationale for the launch of the offshore renminbi was twofold
- economic and geo political. A more flexible currency can play
some role in shielding China from imported inflation. On political front,
the increasing share of Chinese economy in global output demands that
China should take a more active role in global economic affairs.
In Chapter 2 titled ‘Linking the Offshore and Onshore Renminbi
Markets’, the authors address policy and theoretical issues related to
the subject. They argue that in order to internationalise the renminbi,
China has to move towards full capital account convertibility, even if
it moves gradually and takes longer time. Authors have claimed that
in order to transform the renminbi from a purely national currency to
a fully global currency, Chinese banks and financial markets need to
become fully engaged in the global financial system just as Chinese
exporters / importers have become integrated in the global trading
system. The pole position, which the US dollar has attained in present
global financial system, is due to a host of factors including the US’s
willingness to deregulate its financial markets and allow high degree ofintegration with global markets. Hence, unrestricted deliverability of
renminbi becomes a necessary condition for its internationalisation.
Authors point out that for deliverability of the renminbi, it is global
interbank transactions which are important. According to Bank of
International Settlements’ survey of global forex market, China’s share
in the global banking assets and liabilities is less than two per cent. This
share is marginal in comparison with China’s role in the global trade
which has expanded multifold over the years. Authors say that if the
US is taken as a benchmark then Chinese share in global banking assets
and liabilities has to increase by around eleven times from its present
levels, and even if it has to reflect China’s share in the global trade then
its share has to increase by about six times. Hence, authors foresee a
considerable scope for scaling up of renminbi investability.
The book argues that there is a huge difference between full
renminbi convertibility and investability. The essence of full capital
account convertibility is losing control while investability calls for
scaling up of portfolio flows between China and overseas. According
to authors, scaling up of portfolio flows can be done in very controlled
manner. Offshore renminbi is one such controlled experiment. It enables
Chinese authorities to push forward the internationalisation of renminbi
while maintaining a close control in the onshore market.
In the next chapter, ‘the Birth and Evolution of the Offshore
Renminbi Market in Hong Kong’ the authors have outlined the microstructure
of offshore renminbi in chronological order. The ‘RMB trade
settlement scheme’ is the main channel through which RMB has been
able to flow between the Mainland China and the offshore RMB market.
The renminbi trade settlement scheme facilitates offshore renminbi
in three distinct ways, namely, a) by bringing overseas corporations
and financial institutions on board riding on China’s extensive trade
linkages, b) generating offshore renminbi liquidity and c) spurring
the demand for complementary financial instruments and markets for
offshore renminbi.
Although the trade settlement scheme is quite complex in design
and still opaque in functioning, it has witnessed various expansions, fine tunings and iterations since its launch. Initially, under this scheme,
cross border trade of Shanghai and four cities of Guangdong province
with Hong Kong, Macau and ASEAN were covered. Subsequently,
geographical coverage of scheme was increased to entire mainland and
enterprise restrictions were removed. Presently, money can enter to and
exit from China as long as it is backed by genuine trade documents.
Evolution of offshore renminbi has led to emergence of a very
complex financial engineering. It has witnessed development of many
new instruments and entities, such as agent banks (onshore entities to
facilitate renminbi trade settlement) and non-resident account (a new
onshore financial account), etc. Similarly, trading in derivatives has
also witnessed evolution of a plethora of products. Corporate bonds,
denominated in offshore renminbi are known as ‘dim sum’ bonds,
have been issued in Hong Kong and other global financial centres. The
characteristics and liquidity aspect of these instruments are discussed in
the Chapter 4, ‘New Markets – Jargon, New Opportunities’. It is argued
that as long as China does not go for capital account convertibility, the
divergence between onshore and offshore renminbi rate will continue
to exist. Nevertheless, freedom to deliver the renminbi in Hong Kong
without trade documentation has led to emergence of new currency
derivative products. Recent studies have pointed out that corporates
have increased uses of derivative products denominated in offshore
renminbi and reduced their exposure to products denominated in nondeliverable
forwards (NDFs) of renminbi.
Global financial centres such as London and New York are making
special efforts to promote development of ‘dim sum’ bonds. In chapter
5, the authors discuss the growing presence of offshore renminbi
beyond Hong Kong. The authors look into some of the channels
which enabled the offshore renmibi market to grow in size and build
scalability geographically. It is argued that Hong Kong has played a
major role in internationalising the Chinese renminbi. It has played the
role of a gatekeeper by controlling and monitoring cross-border flows
of renminbi from China. In fact, as part of efforts towards promoting
offshore renminbi market, the HKMA and the UK Treasury announced a joint initiative to focus on development of clearing and settlement
system, improving CNH liquidity in overseas markets and developing
CNH products. Presence of global financial institutions in London has
helped it to amass renminbi denominated deposits.
Chapter 6, ‘Drivers for Internationalisation’ has given micro details
of globalisation of renminbi. Authors point out that role of Chinese
renminbi as international reserve currency is disproportionately low.
However, the history of reserve currencies tells that change in global
reserve currency status happens in abrupt and sudden manner. In
present global economic circumstances, Chinese renminbi has every
right attribute to become a global reserve currency. It would give grater
diversification to the global investor class and reduce the burden on the
US dollar. Recent studies have pointed out the growing influence of
Chinese renminbi in Asia Pacific region. Here, however, it is important
to understand that if recent episodes of movement of exchange rate of
Chinese currency are any precursor to exchange rate policy of China
then it can be inferred that it is the Chinese authorities who are more
sceptical on the global role of Chinese renminbi as a reserve currency.
However, the authors have not analysed this issue in the present book.
On the issue of use of renminbi as a global reserve currency or its
inclusion in special drawing rights (SDRs) of international monetary
fund, authors are of the view that it will depend on the pace of
internationalisation of Chinese currency. Authors argue that if emerging
market economies’ share in the global trade and global output is used as
a criterion, then in the present global monetary system, their currencies
are under-represented. However, IMF’s decision about inclusion of
renminbi in SDR calculations will depend on reforms in the capital
account of China and depth and size of global renminbi denominated
financial system. In present circumstances, the use of renminbi in SDR
is still a substantial time away.
Chapter 7, ‘the Rise of the Renminbi and its Policy Implications’
has posed and attempted to answer some forward looking questions,
such as whether rise of renminbi is threat to the Hong Kong dollar, use
of renminbi as global reserve currency and rise of renminbi and role of the US dollar in a multipolar world, etc. On the role of US dollar and
renminbi in a multipolar world, authors have argued that with rising
share of emerging market economies in global output and trade and
fall in the share of advanced economies, dominance of the US dollar
will shrink and that of renminbi will go up. Nevertheless, this does not
mean that Chinese currency will eclipse the US dollar and will attain
the dominating position in the global financial structure. The authors
perceive that the rise of China will be challenged by emergence of
other emerging economies (e.g. India) and the US will also be able to
maintain a sizable share in the global output. Hence, going forward
global financial system will be more a mutlipolar sort of system rather
than dominated by a single currency.
The book covers quite interesting aspects of growing presence
of Chinese renminbi in the offshore market. The book mainly focuses
on evolution of offshore deliverable segment of the market. However,
analysis of book would have been more enriching if it would have
discussed linkages between offshore reniminbi and non-deliverable
forward (NDF) segment. NDF segment of renminbi market is operational
since much earlier in the 1990s. The book concludes that progressive
opening of renminbi to international use has to be seen as a complement
to the mainland’s financial sector reform, not as a substitute. The book
has given a multifaceted overview of emerging scenario in the Chinese
offshore currency market. The authors have concluded that in coming
years the Chinese renminbi will play an important role in global
financial structure as a reserve currency and vehicle of global trade.
However, as all forward looking conclusions in any economic literature
are based on certain strong assumptions, many of the conclusions of
this book are also based on the premise that China would be able to
maintain its high growth trajectory. To a large extent, output growth of
China is dependent on its share in the global trade. Thus for sustainable
economic growth, matching reforms in the domestic economy are
equally important. There is no chapter on domestic economic reforms.
A chapter on domestic reforms would have made book more complete.
That is the only minor lacuna of this book.
References
Lynne Cockerell and Michael Shoory, (2012). “Internationalising the
Renminbi.” Reserve Bank of Australia, Bulletin, June Quarter.
Alexander Ballantyne, Megan Garner and Michelle Wright, (2013).
“Developments in Renminbi Internationalisation.” Reserve Bank of
Australia Bulletin, June Quarter.
Robert McCauley, Chang Shu and Guonan Ma, (2014). “Non-deliverable
forwards: 2013 and beyond.” BIS Quarterly Review, March.
Chang Shu, Dong He and Xiaoqiang Cheng (2014). “One currency,
two markets: the renminbi’s growing influence in Asia-Pacific,” BIS
Working Papers No 446, April.
Avdhesh K. Shukla*
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