What's next after SDR inclusion? The outlook of RMB internationalisation
Renminbi ("RMB") is experiencing growing use outside of China. As a gateway connecting China to the world, what role does Hong Kong play in RMB internationalisation? In fact, Hong Kong has been developing itself as an offshore RMB centre for more than a decade. The effort has paid off - the city is now regarded as the key international platform for RMB settlement, investment and financing. Hong Kong also enjoys the privileges of spearheading various RMB pilot schemes.
For example, in 2004 Hong Kong was the market chosen for the global debut of offshore RMB businesses. It is also the first offshore market to launch RMB-denominated and RMB-settled investment products. What is an "offshore market"? In a nutshell, "offshore" and "onshore" mean "outside of China" and "within the national border of China" respectively. The offshore RMB market is defined to enable more efficient management of the expanding pool of RMB funds circulating outside of China, and to reintegrate this pool of funds into the banking system.
Meanwhile, the exchange rate for RMB can also be quoted in two ways: the exchange rate for offshore RMB (CNH) and onshore RMB (CNY). While CNH is largely determined by demand and supply, CNY is governed by the "middle rate" - an exchange rate guidance of RMB priced in foreign currencies - announced by the China Foreign Exchange Trade System. CNY tends to move within a corridor around the "middle rate". The difference in pricing mechanisms accounts for the discrepancy between CNH and CNY. However, given more frequent cross-border market activities, the CNH-CNY price discrepancy has been narrowing.
In addition to being an important currency for trade settlement, RMB is also recognised as a key investment currency. Similar to HKD-denominated investments, RMB investment products also come in a large variety. There is a wide range of RMB-denominated or RMB-settled products, or even RMB products that invest in RMB-linked assets. Besides unit trusts, bonds and certificates of deposits, there are also RMB securities, Capital Protected Investment Deposits and other RMB Investment products.
As RMB is gaining popularity around the world, the size of the global pool of offshore RMB funds has been expanding continuously. International financial hubs around the world, including Hong Kong, are presented with attractive opportunities through the rise of RMB. Going forward, investors can brace themselves for a diverse array of RMB investment products and services.
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