RMB offshore business refers to the RMB deposit business operating outside China. A business in which both parties to the transaction are non-residents is called offshore financial business
Generally speaking, financial institutions in various countries can only engage in deposits and loans in their own currencies. However, after World War II, financial institutions in various countries engage in deposits and loans in other than their own currencies. Deposits and loans in other foreign currencies are gradually emerging, and financial institutions in some countries have become foreign currency deposit and loan centers around the world. This kind of financial activity that specializes in foreign currency deposits and loans is called offshore finance.
Background
RMB offshore market
RMB offshore business refers to the RMB deposit business operating outside China. The offshore market provides offshore financial services: businesses in which both parties to the transaction are non-residents are called offshore financial services. Before the RMB is fully convertible, there will be a trading market for RMB flowing out of the country. Only in this way can the development of RMB trade settlement be promoted and guaranteed.
The current RMB settlement of cross-border trade is carried out under the capital account and the RMB is not fully convertible. RMB flowing overseas through trade cannot enter the domestic capital market.
In this case, to develop RMB trade settlement, it is necessary to solve the circulation and transaction problems of RMB flowing out of the country, so that enterprises that own RMB can lend out RMB, and enterprises that need RMB can absorb RMB, and maintain the RMB balance. Enterprises with RMB can obtain corresponding benefits, which requires the development of offshore RMB markets so that RMB flowing overseas can be traded in overseas RMB offshore markets. This enables overseas companies holding RMB to raise funds, conduct transactions and obtain profits in this market.
Background
RMB offshore market
RMB offshore business refers to the RMB deposit business operating outside China. The offshore market provides offshore financial services: businesses in which both parties to the transaction are non-residents are called offshore financial services. Before the RMB is fully convertible, there will be a trading market for RMB flowing out of the country. Only in this way can the development of RMB trade settlement be promoted and guaranteed.
The current RMB settlement of cross-border trade is carried out under the capital account and the RMB is not fully convertible. RMB flowing overseas through trade cannot enter the domestic capital market.
In this case, to develop RMB trade settlement, it is necessary to solve the circulation and transaction problems of RMB flowing out of the country, so that enterprises that own RMB can lend out RMB, and enterprises that need RMB can absorb RMB, and maintain the RMB balance. Enterprises with RMB can obtain corresponding benefits, which requires the development of offshore RMB markets so that RMB flowing overseas can be traded in overseas RMB offshore markets. This enables overseas companies holding RMB to raise funds, conduct transactions and obtain profits in this market.
Contact channels
The relationship between the RMB offshore market and the onshore market:
The RMB is not yet fully convertible and capital accounts are still restricted. Under the circumstances, the RMB offshore market and the onshore market are separated. But this separation cannot be absolute. For example, some people suggest that after the RMB flows out of the mainland, it is best to continue to circulate overseas and never return to the mainland. But this is impossible. After the RMB flows to the offshore market, no matter how it operates, it will eventually flow back into the country. At present, there is no economic system that fully uses RMB outside mainland China, and it is impossible to continuously recycle the inflow of RMB without returning to the onshore market.
In other words, the onshore market must be connected with the offshore market. There must be both orderly outflow arrangements and a benign return mechanism to gradually achieve the goal of RMB internationalization. For now, the onshore and offshore markets are connected by three bridges:
First, trade projects. Basically, China’s foreign trade, including goods and services, can choose to settle in RMB and have free cross-border inflows and outflows. As mentioned above, there are currently more outflows than inflows, which provides the required positions and liquidity for the formation of the RMB offshore market.
Second, direct investment. Under the current capital account, foreign direct investment in the mainland is subject to controls and requires approval. In the past, foreign businessmen who remitted U.S. dollars or other foreign currencies needed to obtain approval from the foreign exchange bureau before they could settle the foreign exchange and exchange it for RMB to pay various fees. Similarly, if mainland enterprises want to invest directly overseas, they can only use foreign exchange as a means of payment.
Since January 2014, the People's Bank of China has announced new measures that allow mainland companies to remit RMB out of China for overseas direct investment. As for foreign investors who want to directly invest in the mainland in RMB, they currently need to be approved on a case-by-case basis.
Third, financial markets. The connection between the mainland capital market and the international market is an important measure for the gradual liberalization of national capital account controls, which needs to be done carefully and step by step. There are currently many imbalances and unstable factors in the international financial market. Financial crises in one place can easily be amplified and transmitted to other parts of the world through the international financial market. Capital inflows and outflows may pose a threat to global financial stability. However, if the capital account is to be open, it cannot be completely isolated from the international financial market. It is impossible for all RMB funds flowing into the offshore market to flow back to the mainland in the form of trade or direct investment, and the main markets for value preservation and appreciation are still in the mainland. Therefore, when risks are controllable, it is necessary to gradually and orderly establish connections between the onshore and offshore RMB financial markets. At present, the Central Bank of China has approved three types of overseas institutions
Main significance
The RMB offshore market is of great significance to the RMB becoming an international currency:
First, the main significance International currencies must be traded 24 hours a day. When we sleep, in the time zones of London and New York, there must be offshore markets trading, so that local investors and companies that use RMB for trade settlement have a platform to trade RMB.
Second, major international currencies must have a large number of third-party transactions. Third-party transactions mean that the two counterparties involved in the transaction have nothing to do with China. This is a RMB transaction between two countries, two companies or two people outside China. Third-party transactions in U.S. dollars account for at least half (more likely 2/3). In this sense, if we hope that the RMB will have the same status as the US dollar in a decade or decades, then third-party transactions must account for a considerable proportion. Third-party transactions generally tend to use offshore markets rather than onshore markets.
Third, a large number of non-residents require to hold that country’s currency or that country’s monetary assets outside the issuing country. For example, 70% of U.S. dollar holdings held by non-U.S. residents are invested in offshore markets outside the United States because they are worried that their assets will be frozen in the domestic market.
Fourth, in terms of providing liquidity for global transactions, the offshore market can create liquidity through the multiplier effect and have less impact on domestic monetary policy. The U.S. dollar in the offshore market now and the RMB in the offshore market in the future will have a multiplier effect. Create new liquidity abroad.