RMB Internationalisation: Easing Foreign Investor Access to Mainland China

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In 2014, China’s currency – the Renminbi (RMB) – passed several key milestones on its way to becoming an international trade and investment currency. RMB internationalisation is a process whereby the Chinese currency will eventually become fully convertible with other currencies and inward and outward RMB-denominated direct and portfolio investment controls are relaxed. RMB internationalisation, a long-standing objective of the Chinese government, is slowly becoming realised through a program of government-mandated initiatives that include both regulatory and legal reforms, as well as economic infrastructure development. However, the ongoing success of the internationalisation process hinges on the alignment of this state-sponsored change programme with global macroeconomic and market forces driving demand from foreign investors for financial exposure to the Chinese market.

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In 2012, the People’s Bank of China began to take a three-pronged approach to support RMB internationalisation across a number of global financial centres. This diplomatic toolkit includes; the designation of a non-China-based clearing bank; a bilateral currency swap agreement with the corresponding national central bank; and larger quotas for both Qualified Foreign Institutional Investors and RMB Qualified Institutional Investor schemes.

The offshore financial centres benefiting from these arrangements are competing for a share of the burgeoning international market for RMB securities investment. However, uncertainty around many economic, infrastructural and legal questions remain. This report examines the current status of the RMB internationalisation process, providing an overview of the RMB liquidity distribution and investment channels into and out of China and the key issues that require resolution and clarification in order to encourage the next tier of market participants to invest in China and the RMB in 2015 and beyond.

Published on: 31 Dec, 2014

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RMB Internationalisation — Table of Contents

  • 1.0 Introduction to the Chinese Economy
    • 1.1. The Chinese Current Account and Capital Accounts
    • 1.2. Untying China’s Capital Markets
    • 1.3. Chinese Investment and the Shanghai-Hong Kong Stock Connect Program
    • 1.4. RMB Convertibility
  • 2.0 China’s Economic Idiosyncrasies
    • 2.1. Exchange Rates and Interest Rates
    • 2.2. RMB in the Foreign Exchange Market
    • 2.3. Liquidity and Central Bank Bilateral Currency Swaps
    • 2.4. Treasury Management
  • 3.0 Infrastructure for RMB Internationalisation
    • 3.1. Offshore RMB Centres
    • 3.2. RMB Clearing Banks
    • 3.3. From CNAPS to CIPS
    • 3.4. Chinese Tax and Legal System Concerns
    • 3.5. Settlement Risk and RMB as Cash Collateral
    • 3.6. Chinese Credit Ratings Standards
    • 3.7. Economic Development Zones
  • 4.0 RMB Internationalisation Going Forward
    • 4.1. Reserve Currency
    • 4.2. Parallel Global Economies
  • 5.0 Appendices
    • 5.2. Glossary of Terms
    • 5.3. Table of Figures
    • 5.4. Methodology