RMB Solidifying its Place in the International Capital Market

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Posted on May 31, 2011 at 9:05 PM


The offshore renminbi market (RMB) has come to an important time in its progress as a potential international trade currency. At this point, it is safe to say that renminbi is not a small-scale experiment in the Hong Kong financial market but is rather at the beginning stages of becoming an international trade currency. The scheme, which was originally created in June of 2009, has rapidly grown, most importantly due to the changes made in June 2010. The scheme, originally, allowed for the trading of exports and imports in RMB between participating enterprises of 5 Chinese cities and their trading counterparts in Hong Kong, Macau, and the ten nations of ASEAN. Under the June 2010 growth-plan, participating enterprises in 20 Chinese cities are trading in renminbi with international trading partners. The benefits in doing this for China are clear, as it would reduce US dollars in China, as well as reduce trade costs for China because it uses its own currency.

Growth is increasing very fast. In the time following the pilot scheme, renminbi deposits in Hong Kong grew to 90 billion in June 2010 and as of March 2011 $70 billion. Based on these statistics, it is projected that half of China's international trade will go through renminbi adding up to trillions in 5 years time. Based on this, it is clear that renminbi is not going anywhere; and international trade must be opened to it. Issuers of the offshore renminbi bonds are using the proceeds of the bonds for investments in China, which gives mild assurance that there will be something to fall back on towards the repayment of the bonds, in the case that the renminbi offshore pools is jeopardized. Investors are actually reassured, through an investment clause, that they will be repaid in a convertible currency, if for some reason the offshore pool (doubtfully) does get jeopardized. Though there is some controversy over the clauses, the truth is that it is hardly seen an issue because it is projected not to end up being a risk at all. In order for international confidence and backing of the renminbi currency to increase, there will have to be concrete benchmarks that will show the development of the offshore currency. It will have to prove itself not only against the US dollar but other international currencies as well.

In order for the renminbi to continue its growth, it will need to be accepted and utilized by the international banking community. The way that the renminbi is currently linked to the domestic money supply is through an agreement between the People's Bank and China and the Bank of China, Hong Kong. Together the banks validate the renminbi. The way in which the two banks work together to validate the renminbi is important as it provides Hong Kong with a major position in the international capabilities of the renminbi. Hong Kong's renminbi has an RTGS (real time gross settlement system), which connects it to the PRC's electronic bank system. Basically through this the need for any onshore settlement will disappear. Through this Hong Kong comes out as the center for the international community of the renminbi, as it is the source of its validation. In theory, the ability for international banks to have access to the RTGS is available. But of course, there is big problem stopping this from happening. According to the clearing agreement, all the renminbi in the offshore pool must be cleared and settled through the Bank of China, Hong Kong. Though solutions have been presented, nothing has been solidified for the future of this process. It is interested that Hong Kong is the center of the renminbi offshore pools as it is not subject to the foreign exchange control regime of the PRC. Further complications exist as Singapore is coming into the realm of renminbi trades. If a second offshore pool were to be created in Singapore, how would interactions between the two occur? As questions continue to rise regarding the offshore pools growth, it is clear that the offshore renminbi will prove influential in the international capital market in the future.


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