Are Offshore RMB Arrangements the Basis for a Long-term Exchange Rate System without Convertibility?

This paper discusses China＇s relatively new structure of dual onshore and offshore RMB markets. Its distinguishingJeature is both offshore trading at exchange rates that are market determined and onshore trading at exchange rates anchored at the official spot rate with capital account inconvertibility. We note that thus far the CNH and CNY spot rates have largely tracked each other, suggesting that the shadow priee on the convertibility constraint onshore and also the offshore diversification benefit is close to zero. However, this could change in the future. We discuss the potentialJbr the offshore RMB market to grow with trade settlement and bilateral ,swap arrangements in RMB, which would provide a big enough pool ofliquidityforthe RMB to become a vehicle currency and reserve c^rrency. These potential developments will be restrained by onshore inconvertibility, but moving to convertibility seemingly implies major change in China ＂s financial structure and the offshore RMB arrangements are only a small first step along this path. Crucial in this evolution of arrangements will be fi^ture Chinese growth performance and the relative attractiveness of onshore inconvertible but offshore marketable RA4B relative to the debt laden and slow growth currencies of the USA, the EU and Japan.

A decade of RMB internationalisation

This article recounts China’s renminbi(RMB)internationalisation experiences since the 2009 RMB cross-border trade settlement ini-tiative.In the first few years,the RMB made inroads into global financial markets and had a few remarkable accomplishments,including the Special Drawing Right currency status.Since the 2015 market turmoil,RMB internationalisation has levelled off–possibly due to changes in both domestic and geopolitical condi-tions.The RMB is currently under-represented in the global mar-ket.China’s deliberate and schematic policies will elevate the RMB’s global stature in a gradual manner but there will not be a leapfrogging in the near term.

The Role of Institutions:A Cross-country Analysis of Renminbi Trading in Foreign Exchange Markets

We explore how China's geographically targeted policies impact RMB overseas use individually or in combination.The policies include swap agreements,clearing banks,investment quotas,and direct trading between Chinese renminbi(RMB)and non-USD currencies.Adopting a fuzzy-set qualitative comparative analysis and using Bank of International Settlements cross-country data on foreign exchange markets,we find that institution building has lowered the barriers to international adoption of the RMB.Specifically,for countries economically close to China,high RMB trading is explained by either(i)having a clearing bank in the host market and direct quotations between the RMB and the local currency,or(ii)being a financial center and having access to the Chinese capital market.This combination of policies is explained by the creation of(i)"trading posts"that provide RMB liquidity abroad,and(ii)channels that allow actors to " recycle" offshore RMB funds.We triangulate our results with interviews conducted with senior People’s Bank of China officials.