Pacific Prospective features the research of graduate students.
By Grégoire Legault – gregoire.legault [at] alumni.ubc.ca
The Chinese renminbi, or “people’s currency” (人民币), has been internationalizing more rapidly than experts had previously forecast, even though the country’s capital account remains closed and the currency’s exchange rate is still not allowed to float freely. The redback is crossing national borders at a transitional stage in the country’s financial development. Indeed, China defies the conventional logic behind currency internationalization by maintaining a firewall between the redback in China (CNY) and the redback in offshore markets (CNH), which allows the country to avoid exchange rate volatility and rapid capital flight while simultaneously promoting the use of the renminbi abroad. Such measures include, among others, the execution of trade settlements in RMB, the signature of currency swaps between central banks and the development of so-called “dim sum bonds” (点心债券).
Dim sum bonds are securities that are denominated in RMB (CNH) but issued outside of China. A total of $US39.2 billion worth of such bonds are currently outstanding. They have been issued by various entities worldwide, including private companies and banks. In late 2013, British Columbia became the first foreign government to issue offshore yuan securities when it completed the sale of 2.5 billion RMB one-year dim sum bonds with a yield of 2.25 percent. The AAA-bond was quickly oversubscribed, signifying a strong demand for CNH denominated products. In other words, foreign investors place at least some confidence in the redback’s value, a key prerequisite for currency internationalization.
British Columbia’s move to issue renminbi-denominated bonds is a vote of confidence towards the importance and globally emergent status of China’s currency. It also presents a win-win situation for both Canada and China. For China, the cooperation of a high quality foreign issuer can help further internationalize the RMB. For Canada, the move paves the way for new business opportunities for the Canadian financial sector and Canadian borrowers looking to diversify their sources of financing away from traditional markets, and to ease their overreliance on the American greenback.
In the long run, RMB clearing and settlement of transactions will become increasingly common, thereby lowering trade costs. Canada can take advantage of the internationalization of the redback by consolidating its first-mover position into the offshore RMB market and establishing a major hub for RMB financial services in North America.
Grégoire Legault is a candidate for a Master of Arts in Asia Pacific Policy Studies at the University of British Columbia and a Research Assistant in the Centre for Chinese Research. He has also contributed Memo #244 and Memo #257. You can follow him on Twitter, connect with him on Linkedin or visit his photo blog.
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- “First Foreign Government-Issue of Offshore RMB Bonds Oversubscribed,” Caixin (in Chinese), November 2013
- “With Issuance of Dim Sum Bonds, Opportunity for British Columbia to Develop Multilateral Collaboration with China,” Sina (in Chinese), December 2013
- “Toronto Strives to Become the First RMB Offshore Centre in North America,” Xinhua (in Chinese), December 2013
- “Toronto Reviews Bid to Become Yuan Currency Hub,” Bloomberg, July 2013