Future of offshore RMB market - OMFIF

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The development of the Eurodollar market in London in the 1960s was of paramount importance for the leading role of the USD today. It allowed non-US entities, banks and non-banks to deposit USD in London which were on-lent to non-US entities, banks and non-banks elsewhere in the world. London quickly became the centre for the Eurobond market as it had the legal expertise and other advantages. Thus it created a financial market outside the control of the US government.

Hong Kong plays a similar role for the offshore RMB market (43%), well ahead of London (22%) and Singapore (16%). However, different to the Eurodollar market, mainland Chinese entities play an important role, as depositors, borrowers as well as issuers of CNH bonds. It is home to complicated but essential financial plumbing used by Chinese entities. The PBOC takes an active role in making sure that the CNH interest rates such as CNH HIBOR and exchange rates such as the spot spreads between CNH and CNY never deviate significantly from onshore rates. The PBOC was even mopping up liquidity in the CNH market in 2018.

The offshore RMB market developed rapidly between 2010 and 2015, but largely stalled, since then, except for clearing payments in RMB. Deposits in RMB are flat, credit is declining and bond issues have only recovered since mid-2019 thanks to Chinese authorities. The RMB interbank market with overseas banks was stable.  The main reasons are the convergence of interest and exchange rates and further opening of onshore RMB financial markets.

Given the short history of the CNH market and the political developments in Hong Kong, one needs to consider further internationalisation of RMB, only in CNY or also in CNH, as walking on two legs. Can London or Singapore play the role as hub of an offshore centre for RMB similar to the Eurodollars? Will the Chinese government support financial markets outside its control?

Which are the main differences of the CNH and Eurodollar market? Chinese authorities will never replicate the benign approach of the US authorities to the Eurodollar market. Secondly, capital account controls are in place in China and the offshore RMB/USD exchange rate matters which was not present in the Eurodollar market. Thirdly, the absence of this risk created intimate links between the Eurodollar market with the home country, USA. In addition to deposits by and lending to non-US entities, the Eurodollar market is made up of US deposits to finance loans to the US, US deposits to finance loans to non-US borrowers and finally, non-US deposits to finance loans to US borrowers. This developed because of less regulation and lower margins in the offshore USD market. US owned banks participated and benefited from this market.

Equally, Chinese banks are benefitting from the offshore RMB market acting as the ‘window’, the main intermediaries. It is uncertain whether Chinese authorities will allow them to continue benefitting from arbitration between onshore and offshore RMB.

As Hong Kong becomes more integrated into mainland China, and China’s onshore market continues to open up, its comparative advantage in RMB will diminish. In addition, with cross-border payments increasingly passing through the China cross border interbank payments system there is less need for a RMB settlement system in the same time zone.

Whether there will still be a role for the other offshore centres, such as London, New York, Singapore and Luxembourg will depend on what role Chinese authorities will assign to trading of RMB among foreigners.  If they wanted a true internationalisation of the RMB they should allow foreigners this privilege, similar to the Eurodollar market. However, this  market would develop its own dynamics beyond the direct control of China.

Herbert Poenisch is former senior economist, BIS, Member International Committee, IMI

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Future of offshore RMB market - OMFIF
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