The Offshore Renminbi

Chinese authorities have ambitious plans to "internationalize" the renminbi, transforming it from a tightly controlled domestic legal tender into a global currency for international trade, held by both private and public sector asset managers. The Offshore Renminbi examines this impending currency revolution, outlining why the emergence of China as a major economic power will likely soon be matched by a transformation of the renminbi's role in the global financial system. It explains how new markets for "offshore" renminbi are developing outside mainland China since the country is not yet ready to fully open up its economy to international capital flows, and the regulations that govern them.

The potential growth for the renminbi market is vast, thanks to China's role in the global trading community. The early stages of the internationalization effort were small-scale, but momentum has greatly increased over the past 18 months, making this book more relevant than ever. These developments offer new opportunities (and challenges) for corporate treasurers and investors, as China's profound economic success and growing prominence in global trade may transform offshore renminbi into a new global reserve currency and a legitimate competitor to the U.S. dollar.

• Explores how the "internationalization" of the renminbi is likely to yield a new global currency to rival the U.S. dollar
• Examines "offshore" renminbi and the host of new financial markets they have created, from a spot FX market to Dim Sum bonds in Hong Kong
• Covers broad themes of interest to general readers and policymakers, as well as more detailed issues of practical and direct importance to corporate treasurers and investors

The Chinese government has ambitious plans to make the renminbi a global currency. The Offshore Renminbi explains the complexities of this strategy and the dramatic implications for the global FX markets.

Foreword ix

Preface xiii

List of Acronyms and Key Terms xvii

CHAPTER 1 The New Global Role for the Renminbi 1

A Longstanding—but Failing—Path 4

Allowing Renminbi Markets to Flourish 9

Political Tailwinds for Internationalisation 13

Challenges and Consolidation Risks 19

The Renminbi in a Multipolar World 23

CHAPTER 2 Linking the Offshore and the Onshore Renminbi Markets 25

International Transactions in a Domestic Currency 25

The Starting Point for Renminbi Internationalisation 31

Investability: Opportunities and Challenges 40

Timing Convertibility 45

PBoC and Exchange Rate Policy 50

The Advantages of the Offshore Renminbi 53

CHAPTER 3 The Birth and Evolution of the Offshore Renminbi Market in Hong Kong 57

A Chronological Look at Key Policy Liberalisations 59

More on Renminbi Trade Settlement in the Post–Big Bang Era 79

From Renminbi Trade Settlement to Offshore Renminbi Deposits 93

CHAPTER 4 New Markets—New Jargon, New Opportunities 101

The Chinese Yuan in FX Spot 101

A New Diversity of Forward Markets 109

Opportunities in the CNH Markets 112

Tracking Returns in CNH Deposits 121

The Dim Sum Bond Market Matures 126

CHAPTER 5 Geographical Expansion of the Offshore Renminbi Universe 131

From Hong Kong to Haiwai through Trade 133

Renminbi in London and the Hub-and-Spokes Model 139

Direct Renminbi Cooperation with Mainland China 142

Shanghai’s Aspiration and Infrastructure Overhaul 147

Hong Kong Is Still in Pole Position 151

CHAPTER 6 Drivers for Internationalisation 163

Public Policy: “Replacing” USD 168

Economics: China’s Role in the Global Economy 174

For Investors: Appreciation—but, More Importantly, Diversification 178

For Corporations: Fairer and More Transparent Pricing 182

For Official Reserve Managers: A New Route to Stability? 187

CHAPTER 7 The Rise of the Renminbi and Its Policy Implications 193

The Renminbi’s Rise: A Threat to the Hong Kong Dollar? 193

The Renminbi’s Rise: A Regional FX Anchor 198

The Renminbi’s Rise: The SDR and the IMF 206

The Renminbi’s Rise: The US Dollar in a Multipolar World 213

Afterword: The Life Overseas with the Rising Renminbi 217

Appendix: The CNH Timeline 223

Bibliography 229

About the Authors 231

Index 233

Robert Minikin is the Senior Foreign Exchange Strategist with Standard Chartered Bank, Hong Kong. He is a member of the Global Foreign Exchange Strategy team focusing on Northeast Asia FX, with a particular emphasis on "CNH," the new Chinese yuan (CNY) offshore market in Hong Kong. He is a well known commentator on financial market development who is regularly featured both in the print and broadcast media. Mr. Minikin has more than twenty years of experience in financial market analysis. He holds first and second degrees in economics from the University of London.

Kelvin Lau is a Hong Kong–based economist covering Greater China, specialising in Hong Kong and the Pearl River Delta in Southern China. Kelvin joined Standard Chartered Bank as an economist in September 2000 and is currently a member of the Greater China research team. With a focus on Hong Kong and the Pearl River Delta (PRD) region in Sourthern China, Kelvin provides macroeconomic analysis and on-the-ground views of major economic issues. His views are quoted by various international as well as local media. He holds a degree in economics from the London School of Economics and Political Science.

The implications of China's momentous decision to internationalise its national currency extend far beyond its many clear advantages for national and regional trade and economic stability. While the Chinese government's game plan regarding the opening of the renminbi to the global markets remains obscure, no one can doubt that its goals are ambitious—including, perhaps, replacing the U.S. dollar as the global reserve currency.

As a global currency, the offshore renminbi is still a comparatively minor player, limited mainly to the Hong Kong Dim Sum bond and FX spot markets. Yet it already has begun to have a significant impact on the global business and finance status quo, challenging time-honored market practices—such as invoicing in U.S. dollars—and creating a steadily mounting wave of new financial products and investment opportunities.

Written by two Hong Kong–based analysts with unparalleled expertise in Chinese market development and insider knowledge of the Chinese authorities' motives and mission regarding the renminbi, The Offshore Renminbi provides detailed answers to questions about the rise of the renminbi that are of critical importance to international business, finance and public policy professionals. Supported by first-hand source material and extensive original research, Robert Minikin and Kelvin Lau reveal:

• The motives behind China's decision to open its national currency to global free market forces and what it really hopes to gain by the move
• The role the global credit crisis of 2008 played in the timing and structure of the rollout of the offshore renminbi
• Why China has not fully opened its economy to international capital flows
• How long it is likely to be before China fully opens the renminbi to a global free market
• Regulatory measures which have laid the foundation for the new offshore renminbi
• The huge potential for renminbi market growth given China's increasingly central role in global trade
• The new financial markets and instruments that have sprung up around the offshore renminbi and their importance for investors and traders
• Public policy implications of an internationalised renminbi and the seismic shifts already underway in both the Asian and global economies

The first authoritative, in-depth analysis of the rise of the renminbi and what it means for the international markets, The Offshore Renminbi is a valuable resource for corporate treasurers, real money and hedge fund investors, FX traders and financial officers at multinational corporations, as well as government policymakers and academic researchers in a variety of related fields.

Reveals the truth about China's big plans for its national currency and the global implications of an "internationalised" renminbi

"Robert and Kelvin have done an excellent job detailing the infrastructure of renminbi markets, in China and offshore, and describing specific policy moves to encourage internationalisation of the currency. Its accession to reserve currency status will depend on removal of Chinese exchange controls, acceptance of a floating yuan, and probably the end of interest-rate fixing within China, moves that could take much longer than the authors suggest. But as China moves down this path, this book will be a good guide to understanding its implications."
—Charles Dumas, Chairman and Chief Economist of Lombard Street Research

"Minikin and Lau have written a timely, comprehensive, and useful book on what may be the most important opening of Chinese financial markets for years. China needs to embrace deeper reforms to continue to grow, and the relaxation of capital controls and a growing international role for the renminbi will be essential steps in that process. Understanding what is happening in Hong Kong and beyond with the renminbi is vital for anyone interested in Chinese growth."
—Fraser Howie, Managing Director, CLSA Singapore and co-author of Red Capitalism

"The authors have provided a comprehensive and illuminating description of the internationalisation of the renminbi, one of the most significant financial stories of our time."
—Robert Cookson, Asia Markets Correspondent at the Financial Times