The Internationalization of the Chinese Currency: CNH Vs CNY

The Internationalization of the RMB

It is unprecedented in the history of the world to see a major economy joining the global financial system in this manner. China, already the world’s largest trading nation is eager to integrate with the rest of the world, while the pressure to make the RMB freely convertible has become increasingly urgent;  but complicated by its own internal issues, China is finding a creative solution to the internationalization of its currency.

RMB traded offshore is known as CNH while those found inside of China is CNY. These two holdings can now be mutually exchangeable only for trade purposes; with proper documents presented to the various banks in various provinces where such policy has been effective. It is expected that more cities will be allowed to enjoy this facility to facilitate the use of RMB in the settlement of international trade.

China has allowed the free trade of RMB in offshore markets; and Hong Kong has been established as the “offshore MRB’ market. Since early 2010, the offshore RMB FX market in Hong Kong has grown significantly, with RMB-denominated deposits reaching RMB315bn ( or US$48bn) by the end of 2010, up from RMB62bn ( US$9b) a year earlier. Cross-border trade settlement reached RMB101 bn (US$15bn) per month as at December 2010, compared with just RMB10bn (US#11.5bn) in June 2010, the first month the trade settlement scheme as expanded to cover 20 Chinese provinces and cities.

Parallel to this development was a three-fold rise in trade settlement volume, in the first five months since expansion of trade settlement, to RMB340 bn (US$52 bn). Trade settlement will still be the primary factor determining the size of supply of offshore RMB in Hong Kong. One-off liberalization or capital accounts is not expected by most analysts in the near future.

RMB-Denominated Bonds in Hong Kong (Dim Sum Bonds)

From the list of new RMB products developed, RMB-denominated bonds, commonly known as “Dim Sum bonds” is perhaps one of the most significant. By the end of 2010, 50 offshore RMB-denominated bonds had been issued in Hong Kong. A total of RMB35.7 bn (US$5.5 bn) was raised. The average coupon in the offshore market is 1.53% (without any adjustment for credit rating), compared with about 4% for onshore state-owned enterprises. Insurance is expected to more than double in 2011.

Source: ANZ and the Asia Society Report on the Internationalization of the RMB

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