The Offshore Renminbi: The Rise of the Chinese Currency and Its Global Future

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The rise of the renminbi and what it means for forex markets

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.

The Offshore Renminbi: The Rise of the Chinese Currency and Its Global Future Review

Lest it be forgotten, the authors of this timely and fascinating book places on record the critical dates in which the Chinese renminbi began the process of internationalisation. The baby steps began quietly, almost unnoticed in December 2003 with the introduction of limited retail conversion into renminbi by personal depositors in Hong Kong. In July 2010 the People's Bank of China signed a memorandum with the Hong Kong Monetary Authority allowing the renminbi to be used freely in the international markets. In August 2011, the Chinese government launched the third and biggest sale of Chinese Government Bonds in Hong Kong, implicitly setting Hong Kong as the geographical centre ("home") of the international renminbi. The policy intentions are clear. China wants to have the same "exorbitant privilege" of the US - to be able to issue government debt to overseas holders of the renminbi. But its approach has been cautious. China was not a participant in the 2008 subprime market that hit the US and European economies. The August 2011 bond sale, however, marked a clear acceleration of the process of internationalisation.

The willingness of multinational corporations to settle in renminbi will be critical to China. In Chapter 6 of this book the authors examined the reasons such corporations should and would be willing to do so. The "ultimate prize in renminbi internationalisation will be when it has all the characteristics we see today in the US dollar - including as a liquid currency of last resort." The authors believe that the shift may come from a sort of herd mentality, when more and more corporations use the renminbi to settle its transactions, as they stated, "Just as we choose to learn a specific foreign language or maintain a profile on Facebook - because the language is widely spoken or many of our friends are on Facebook." This might perhaps be a superficial perception, but the authors quickly point out the similarity in trade patterns between the UK and China. The latter's role in merchandise trade today is, in the authors' view, a favourable factor for internationalisation. When we add the size of China's economy and the steady rise in China's standard of living to the equation international usage of the renminbi will accelerate. Further, international investors had played an important role in the offshore renminbi from the outset, and should the renminbi hold its value against the other major currencies and assets, the foundation will be strong enough to encourage even deeper involvement by such investors. The authors firmly believe that such investors have a pivotal role to play.

As we are witnessing the early movements, the authors point to some crucial impact and implications that would be worth noting. One of which is the impact of the offshore renminbi on the Hong Kong dollar itself. The question whether the Chinese policy might become a role model for other Asian governments is another. The big question is whether the renminbi might become a foreign exchange anchor in Asia, given the dominance of the US dollar and the Euro thus far. Finally, might we see eventually an Asian monetary union? The authors reminded us that the last great hope was the Japanese yen. Similar optimism had been expressed about the yen 15 to 20 years ago. The Chinese government, and indeed, all Asian governments would like to learn from the lessons in history. If the Chinese succeed, it might be at the expense of the US dollar. The authors seemed to believe that the US dollar will diminish over time. They warned, however, of important challenges - the Chinese authorities must "manage [the] growth of the currency's external use alongside financial market reform and capital account liberalization." However, the authors also believed that the renminbi will rise to stand alongside the developed currencies but not eclipsing them. China's great fear of inflation and a revaluation of its renminbi by free market forces presently ensure that it will not be moving too quickly. The next decade will be a fascinating one for China watchers.

Those who find this book interesting might also wish to read Henry Sanderson and Michael Forsythe's "China's Superbank", 2013 John Wiley & Sons. That is an account of the influence of the China development Bank in recent times across the world. This bank has been expanding Chinese financial power and influence across the globe.

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