4 - China’s Strategy of Internationalizing the RMB

Summary

In Chapter 4, I discuss China’s strategy of internationalizing the RMB. China’s financial system is still immature compared with that of the most advanced countries, and still needs to improve on reliability, efficiency, breadth, depth, and liquidity. Its currency is still not fully convertible in the capital account, and there are capital controls. Thus, market forces alone would not be able to make the RMB a significant international currency, and government policy is required. Borrowing the “one country, two systems” idea, the Chinese government decided to create an offshore RMB market that is not completely integrated with the onshore one. They facilitated the formation of offshore RMB centers in Hong Kong, Singapore, Taipei and London. The CNH (offshore RMB) is a fully convertible currency in the offshore market. In the offshore centers, the markets for CNH bank deposits and CNH-denominated bonds, loans, and other financing gradually developed. Other policy measures taken include: encouraging RMB trade settlement in RMB, bilateral currency swap agreements with foreign countries and various capital account opening schemes. At the same time, China has gradually built up its international interbank payment system, called the Cross-Border Interbank Payment system (CIPS). I also discuss an “RMB Internationalization Index”.