China’s RMB Internationalization Strategy and Capital Account Liberalization

This project explores how China’s renminbi offshore market and offshore RMB centres have evolved and examines the implications of the launch of the Shanghai Free Trade Zone in 2013.

China has launched a number of policy initiatives since June 2009 to promote the international use of its currency, the renminbi (RMB), as an approach to reduce the country’s reliance on the US dollar. As the RMB is not a fully convertible currency and its capital account is yet to be fully opened up, China’s strategy to promote the RMB in the global market is based on a two–track approach, promoting the use of the RMB in international trade and establishing offshore RMB markets. 

Thanks to China’s policy efforts, the offshore RMB market has experienced rapid growth after the outbreak of the global financial crisis in 2008. Financial centres both in Asia, namely Hong Kong, Taipei, Singapore and Seoul, and in Europe, such as London, Frankfurt, Paris and Luxemburg, have begun to vie for their roles in the nascent RMB offshore market. 

On the other hand, since June 2010 the RMB has gradually been used as a carry-trade currency due to market segmentation between the onshore and offshore RMB. This is partly a result of the PBoC’s unwillingness to allow the exchange rate to flexibly adjust to appreciation pressures stemming from China’s large current account surplus and foreign direct investment inflows. 

As part of Beijing’s plan to liberalize its capital account, China launched a pilot free trade zone in Shanghai in October 2013. If successful, this policy initiative will roll out across the whole country and eventually lead to a fully opened capital account enabling international finance to be carried out under liberal international rules within China’s onshore market. However, the lack of progress in implementing meaningful steps to make the FTZ an ideal business hub for international investors, and the absence of a transparent and consistent regulatory framework, raise considerable concerns about whether the policy measures made in the Shanghai FTZ are replicable to the entire onshore market.

The project involved research workshops in London and Beijing, which focused respectively on the opportunities and potential risks from the experiment of the Shanghai FTZ and on the latest dynamics of the offshore RMB centres as well as on the macroeconomic effects of China’s RMB internationalization and capital account liberalization. A summary paper incorporates expert insights from the workshops. 

The project is run in partnership with the Institute of World Economics and Politics (IWEP) at the Chinese Academy of Social Sciences (CASS). The project is supported by the British Academy, whose contribution is kindly acknowledged.