Keynote 1, Dong He | International use of the Renminbi

Conference on
The BRICS & Asia, Currency Internationalization,
and International Monetary Reform
Hong Kong, 10-11 December 2012
International Use of the Renminbi:
Developments and Prospects
Dong HE (何東)
Executive Director (Research), Hong Kong Monetary Authority
Director, Hong Kong Institute for Monetary Research
* The views expressed here do not necessarily represent those of the HKMA or the HKIMR
Questions to address
What is the macroeconomic and financial market context in
facilitating the international use of the renminbi?
What are the infrastructure requirements that need to be put in place
for the renminbi to be used for cross-border trade and investment?
Why do non-Chinese residents have incentives to hold renminbidenominated assets and liabilities? How do they acquire renminbidenominated assets and liabilities?
Is renminbi internationalisation compatible with the gradualist
approach to capital account liberalisation?
What’s the progress? Where do we go from here?
Outline of presentation
The context
The role of official policies
The role of offshore markets
The context
The “dollar shortage” during the trans-Atlantic financial crisis of
2008-2009 highlighted the danger of relying excessively on one
reserve currency in international trade and payments, and the
possible benefits of using a wider array of currencies, including
emerging market currencies, especially in transactions between
emerging markets
More broadly, the spread of the crisis globally was seen as an
intrinsic defect of the international monetary system, where
domestic policy objectives of the major reserve currency country
override its obligations to maintain global monetary and financial
The role of official policies
Whether or not a currency is used extensively for international
transactions is primarily determined by market forces
Renminbi internationalisation is more a process of dismantling
extant restrictions against its international use, rather than active
Since mid-2009, the Chinese authorities have moved quickly to
remove restrictions against the use of renminbi in current account
transactions, and have gradually expanded the scope for the use of
renminbi in capital account transactions
The main challenge in managing the process is to delineate the
relationship between currency internationalisation and capital
account liberalisation
Currency internationalisation is seen as an integral component of
the broad financial sector reform and development agenda, and can
be made consistent with the Chinese approach to capital account
Capital account liberalization with
Chinese characteristics
“Proactive, controllable, and gradualist”
Sector- or location-specific policy experiments
“Quick small steps”
“Speed bumpers”
The degree of convertibility of the renminbi is best seen as a
spectrum, not black or white
Preconditions for international use of
Except for non-deliverable markets, international use of
currencies is impossible without the cooperation of onshore banks
Cross-border use of currencies is an international financial
transaction and requires some degree of non-resident
Offshore banks need to be able to keep and have access to
clearing balances with onshore banks
Special arrangement in Hong Kong
Before July 2009, offshore banks generally could not maintain and
have access to renminbi balances kept with onshore banks
Hong Kong was the first place outside Mainland China to provide
renminbi banking services since 2004
For renminbi banking in Hong Kong, a “Clearing Bank” was
appointed by the People’s Bank of China (PBoC) in late 2003 to be
the conduit, which
accepts deposits from participating Hong Kong banks and in turn
maintains balances with PBoC
acts as the counterparty of currency exchange transactions of the
participating banks and in turn squares its own positions in the China
Foreign Exchange Trading System in Shanghai
Non-resident convertibility further
expanded in 2009 and 2010
With the launch of pilot scheme of RMB trade settlement in July
2009, overseas banks could open correspondent accounts with banks
inside China
From August 2010 overseas nonbank institutions accepting payments
for exports to China in renminbi can deposit the proceeds from such
transactions on accounts with banks inside China
Sources and uses of renminbi funds
Outflows from China
Payments in renminbi for imports by Chinese firms
Payments in renminbi for outbound direct investment (ODI) by Chinese firms
Banks make loans to overseas firms in renminbi
Onshore banks make loans to offshore banks in renminbi
Swap lines with foreign central banks
Inflows to China
Payments in renminbi for imports from China
Payments in renminbi for FDI investment inside China
Repatriation of renminbi proceeds from bonds issued overseas by Chinese banks
and firms, subject to approval
Investment in the interbank bond market by foreign central banks and commercial
banks which provide renminbi trade settlement services, subject to approval and
Investment in the bond and equity market by Qualified Foreign Institutional
Investors (R-QFII), subject to approval and quota
Incentives (I)
Market forces have responded quickly to official policies
Non-Chinese residents have strong incentives to increase their
exposure to renminbi assets and liabilities because the starting
positions are in all likelihood significantly below their desired or
optimal portfolio allocations in the renminbi
Such optimal allocations are likely to grow with the increasing
weight of the Chinese economy in global production and trade
The underlying incentive to increase exposure to renminbi assets and
liabilities by non-Chinese residents is likely to have an upward trend,
not easily reversed by cyclical fluctuations in exchange rate
Incentives (II)
From the Chinese residents’ point of view, the use of renminbi for
trade invoicing and settlement allows Chinese firms and their
counterparts to better share risks
Internationalising the renminbi can also be expected to reduce
currency mismatch of China’s international balance sheet
An internationalised renminbi would allow governments and firms
outside China to borrow in renminbi and thereby allow Chinese life
insurers and pension funds to diversify credit while matching
renminbi liabilities
Why do offshore markets exist?
Offshore markets play essential economic functions even when
capital can flow freely across the border (He and McCauley (2010))
– Separation of currency risk from country risk
– Convenience factors (legal systems, accounting standards, language,
time zone/geography)
– Diversification of operational risk
Even nowadays, when foreigners use the US dollar to settle trade and
make investments, they concentrate their transactions in international
financial centres such as the euro-dollar markets in London, not
onshore in New York City
In fact, one may argue that without the offshore markets, the US
dollar would not probably have attained as dominant a position in
international trade and payments as it occupies today
Hong Kong as a renminbi offshore centre
Hong Kong was the first place outside Mainland China to provide
renminbi banking services since 2004
Because of the willingness and ability of Hong Kong monetary and
regulatory authorities to cooperate closely with their counterparts on the
Mainland, Hong Kong is the ideal offshore jurisdiction to provide a
reliable testing ground for the international use of the renminbi
Gradual and steady expansion of business scope, markets and products
The CNH market in Hong Kong
Since July 2010, Hong Kong has produced a second set of spot and
forward exchange rates for the renminbi, dubbed the CNH, for delivery
of renminbi against dollars outside Mainland China
A second set of renminbi yield curves has also been formed in Hong
Kong with the active issuance of bonds by the Chinese Ministry of
Finance and firms from both inside and outside China
These offshore renminbi exchange and interest rates have retained a
spread over but have tended to move in tandem with onshore rates
Size of the renminbi forex market
in Hong Kong
Payment versus Payment (PvP) in the RMB RTGS system
 RMB 15 billion average daily turnover in H1 2012
There are however other forex transactions not reflected in PvP
turnover; the actual size of the RMB forex market in Hong Kong is
probably twice as large as the PvP figure of RMB 15 billion per day
Efficient clearing and settlement systems, seamless interface with
Mainland’s CNAPS
PvP settlement device eliminates FX settlement risk for banks
Capital account liberalisation and renminbi
fund flows in offshore markets
At present, the renminbi balance sheet of banks in Hong Kong serves
as a conduit for net renminbi lending from the rest of the world to the
mainland. Renminbi bonds issued by non-banks and held outside the
banking system tend also to result in a net renminbi claim of the rest of
the world on China
Looking forward, capital flows can be expected to become two-way
and more balanced with capital account liberalisation (He et al (2012))
The expected path of the renminbi exchange rate shows much less
consistent appreciation, even as the Chinese current account surplus
has narrowed. Thus, non-resident borrowing in the renminbi looks to
be less discouraged by one-way expectations on the exchange rate
In this case, the renminbi offshore markets in Hong Kong and in other
centres can be expected to evolve along the paths of the other types of
offshore markets. Over time, the renminbi offshore market is likely to
play above all the role of intermediary between non-mainland Chinese
borrowers and lenders
How would offshore renminbi markets
Types of transactions in offshore banking markets
Use of funds
Pure offshore
lending – inflow to
home country
Pure round-tripping
Source of funds
lending – outflow to
rest of world
Source: He and McCauley (2012)
How fast will it go?
The Mainland authorities are likely to proceed steadily and will strive to
achieve a good balance between containing potential risks on the one
hand and reaping the benefits of wider international use of the renminbi
on the other
They are likely to manage the pace of the international use of the
renminbi so that it is consistent with their overall approach to captial
account liberalisation, and maintain a “spectrum of convertibility” of the
Will the renminbi become a widely used
international currency?
In the long run, the status of the renminbi as an international currency
will depend on the size of the Chinese economy and the sophistication
of renminbi financial markets
– As long as Chinese economy keeps a fast pace of growth and further
integrates with the global economy, the prospect of the renminbi is bright
The status of the renminbi as a global reserve currency will also
depend on China’s ability to transform the structure of its international
balance sheet
– It needs to master the technology of providing liquidity service by issuing
short-term liabilities to non-residents while at the same time making
productive claims on non-residents
Concluding remarks (I)
Large potential of trade and investment flows between emerging
market economies provides a good opportunity for these economies
to use their own currencies for such cross-border transactions
Wider use of the renminbi in cross-border trade and investment will
allow Chinese residents to share risks with their overseas
Facilitating the international use of the renminbi requires a
deliberate pace of institutional reforms and policy liberalisation,
which in turn would be conducive to a more open and marketbased financial system in China
Concluding remarks (II)
The pace of financial system reform and capital account
liberalisation in China is set to accelerate in the next five years
How quickly will it go? Not too fast, not too slow
Hong Kong is well positioned to benefit from the process as the
premier offshore renminbi centre
End of presentation
Thank you for your attention!