Over the past four years, China has strongly intensified its efforts to promote the internationalization of the RMB (CNY), which has become one of the main aspects of the country's economic policy as expressed in the 12th Five- Year Plan (2011-2015). The Plan specifically supports the expansion of the cross-border use of RMB and the gradual realization of RMB capital account convertibility.
Furthermore, the Plan supports the development of Hong Kong as a major offshore RMB market.
The internationalization process of the Country was put into effect through three different instruments:
- bilateral currency swap agreements with other countries;
- a pilot program for the regulation of trade with foreign countries, started in 2009 and gradually expanded, according to the usual approach of Chinese government; and
- the introduction of measures to increase operations in RMB in Hong Kong, which currently is the main center for offshore operations using the Chinese currency.
With regard to the first point, especially after the financial crisis in 2008, China joined several bilateral swap agreements, before with neighbouring countries with whom it had more business relationships and then with several different countries. Starting from some of the major Asian countries, China has signed swap agreements with countries such as Argentina, Belarus, Iceland, New Zealand, Turkey, and United Arab Emirates.
The Pilot program allows regulation of trade with foreign countries in RMB, since July 2009:
- at the beginning limited to 5 cities (Shanghai, Guangzhou, Shenzhen, Zhuhai, Dongghuan) and limited to the trade of Chinese residents (importers without limitation, exporters only if included in the list of approved companies) with Hong Kong, Macao and ASEAN countries (Association of South-east Asia). The Administrative Measures for the Pilot Scheme of RMB Settlement of Cross Border trade and the relevant Detailed Implementing Rules established the first legal framework for using RMB to settle current account transactions. They lay down basic regulatory elements of the Pilot Scheme, including the required eligibility of companies for participating in the Pilot Scheme.
- from June 2010, it was expanded to 20 provinces and cities in mainland China and geographically extended to the trade with the rest of the world.
- since October 2010 and to facilitate the implementation of the Pilot Scheme, the Chinese government has allowed offshore entities to open Non Resident RMB bank settlement Accounts (NRAs) with onshore banks and use this kind of accounts (NRAs) for lawful cross-border RMB business. This kind of accounts provide a new channel for cross-border RMB business and a new tool for the Chinese government to indirectly regulate offshore RMB.
This opportunity was extended to the whole nation in August 2011. Companies can therefore regulate foreign trade transactions in RMB through clearing platforms in Hong Kong and Macau or through local commercial banks authorized to act on behalf of foreign banks joining the program.
With regard to the third point, China has facilitated both the development of financial transactions in RMB on the Hong Kong platform as well as improved access of foreign investors to the domestic interbank market:
- since June 2010 were in fact removed all barriers to the yuan in Hong Kong banks that can now freely offer yuan accounts to the corporate and private clients and yuan loans to corporate customers, as well as other financial services and insurance. The clearing platform in yuan in Hong constituted by the PBOC and Bank of China HK, can provide paper money exchange services for authorized banks in Taiwan;
- during summer of 2010 a new pilot program was launched: it allows foreign central banks, the clearing banks in Hong Kong and Macao and foreign financial institutions to invest in China's interbank bond market.
The operations in CNY in Hong Kong has meant the birth of RMB financial instruments issued in Hong Kong, particularly bonds, so-called Dim Sum Bonds.
To promote the use and acceptability of the RMB offshore, since January 2011, the Chinese government launched a pilot RMB Overseas Direct Investment scheme (hereinafter “RMB ODI”) to allow Chinese companies (including FIEs) to use RMB to invest project outside China.
To further support the RMB ODI Pilot Scheme, the Chinese government has, since April 2011, started to allow Chinese non-financial sector companies to extend RMB loans to their overseas investee companies. This launch is also consistent with the “going out” policies implemented by the Chinese government. Chinese companies have long been encouraged to diversify their asset bases and risks by investing overseas. The RMB ODI Pilot Scheme projects also helps to alleviate the onshore liquidity surplus and to further ease inflationary pressures in China. This program has been extended to the whole country in August 2011.
With the successful implementation of the Pilot Scheme, more foreign investors now hold a sizeable amount of RMB offshore. On the one hand, the off shore investment channels for the RMB are limited and need to be expanded. On the other hand, the Chinese government is concerned about the risk associated with speculation by offshore RMB holders on future appreciation of the RMB.
In order to widen the onshore investment channels for offshore RMB funds and reduce the risk of currency speculation activities, since October 2011, the Chinese government has adopted a set of new RMB foreign direct investment (FDI) rules to allow and regulate RMB FDI projects, with certain sectors restricted or excluded and subject to the existing law on foreign direct investment.
This policy means that foreign investors can now use RMB as an alternative payment currency for capital contributions to FDI projects in China, which have been so far required to be made in foreign currency and now it is possible to have a sino-foreign joint venture where all parties invest using RMB. The RMB FDI Rules represent another important plank of the Chinese government’s policy on the internationalization of the RMB.
To further facilitate the flow back of RMB funds sitting offshore, the Chinese government kicked off a pilot program in December 2011 for RMB Qualified Foreign Institutional Investors RQFII with an initial quota of RMB 20 billion and later increased it to RMB 50 billion in April 2012. This allows Foreign Qualified Investors to use RMB funds raised in Hong Kong to invest in the onshore chinese securities market to the extent of their permitted quotas and subject to the investment instruments being within the permitted scope.
According to this program, offshore RMB holders have access to the mainland China bond and equity markets through a RMB Qualified Foreign Institutional Investors quota. This potentially expands the scope of the existing Qualified Foreign Institutional Investor Scheme.
Measures to promote a progressive internationalization of the Chinese currency waiting to reach full current account convertibility, are destined to increase in the coming years, especially if China is to achieve its goal of making Shanghai an international financial center international 2020.
Free convertibility of RMB on the capital account transactions and full RMB internationalization are the mid-tolong term goals of the Chinese government.
However when a set of rules are established (particularly when new rules are frequently issued by various government agencies with different regulatory interests and areas), there will always be problems with the interactions between different Chinese government agencies and conflicts between the existing rules and the new rules, which will take time to resolve. These types of conflicts have existed for many years and are nothing new.
These turf wars do not detract from the clear determination of the Chinese government to take many individually small but collectively important steps towards the internationalization of the RMB and ultimately, the full convertibility of the RMB on the capital account, which seems unavoidable over the long term.
For foreign investors, the impact of the changes will be felt in many ways, including the new option of engaging in foreign direct investment in China using offshore RMB and using the FIE to borrow RMB as well as foreign currency loans to finance that FIE.