7 - The Importance of the Offshore RMB Market

Summary

Chapter 7 explains the importance of the offshore RMB market. Historically, an international currency had to be fully convertible in the capital account. However, China wants the RMB to be convertible only in a controlled manner, as its institutions are still immature. Thus, making use of offshore RMB centers is a crucial part of the RMB internationalization strategy. Through this strategy, China sets up a firewall between the onshore and offshore markets, allowing full convertibility of RMB in the offshore market but partial convertibility in the onshore market. I study the operation of the offshore RMB centers, in particular that of Hong Kong, which is by far the largest offshore center. I describe in detail the difference between the onshore and offshore FX markets. I discuss the settlement and clearing of offshore RMB payments. Importantly, I describe in detail the Cross-Border Interbank Payment System (CIPS) and compare it with the Clearing House Interbank Payments System (CHIPS) of the United States. I explain the economics behind the operation of the Hong Kong offshore market—in particular, the determination of the interest rates and exchange rate in the offshore market. Finally, I compare the offshore USD market and the offshore RMB market.