It is known to all that the renminbi can only be traded strictly within the Chinese mainland and regulated by the PBOC (People's Bank of China, the Chinese central Bank), while the renminbi that circulates outside mainland China, known as offshore RMB, can not flow back China’s capital market again. Thus, an offshore RMB market is formed to meet the enterprise demand to trade RMB, raise funds, and gain profits. This leads to different features of the Chinese currency in the onshore and offshore markets, and thus two tickers are assigned to distinguish them.Onshore RMB vs Offshore RMB In the onshore Mainland China market, the Chinese Yuan is called CNY. The onshore RMB market is mostly regulated and influenced by China’s laws and regulations, with the Central Bank, domestic banks, financial companies controlled by large-scale SOEs, and domestic branches of foreign banks as major participants. It has a longer history and a larger scale compared with the offshore RMB market. However, since China adopts a system of managed floating exchange rate, the onshore RMB rate cannot reflect the actual market supply and demand. On the other hand, offshore RMB is issued outside mainland China. Going beyond the framework of mainland China’s laws, regulations, and rules, it can freely flow in the international market. With floating exchange rate, it is heavily affected by overseas financial markets, reflecting the demand and supply of RMB. China has not fully opened its capital account yet, so the RMB flows outside China into the offshore market mainly through the following four channels: 1. Individuals. They carry cash outbound or exchange RMB to foreign currency outside mainland China, e.g. mainland tourists exchange RMB to HKD or directly buy commodities or services in RMB in places where RMB is acceptable. 2. Non-financial enterprises. They transfer RMB from domestic bank accounts to overseas bank accounts through cross-border trade settlement, e.g. mainland importers settle in RMB for imported goods, and overseas exporters pay in RMB for commodities and service sold to mainland China’s customers. 3. Domestic banking institutions. They lend RMB to overseas projects. 4. Central Bank. PBoC enters into a multitude of bilateral currency swap agreements with other countries and regions. Among all the four channels, the non-financial enterprises are the largest source of offshore RMB. Hong Kong SAR and the UK have engaged in a tense competition for the offshore RMB trading hub for many years. With first-move advantage, Hong Kong SAR ranked the top in the early stage of RMB internationalization. But as a late comer, London, relying on its status as an international financial center, has outstripped Hong Kong with record amount of trading volumes. Hong Kong SAR Hong Kong’s renminbi banking business was launched in February 2004 to facilitate cross-border tourist spending and to further strengthen economic integration between Hong Kong and the Mainland. The services cover renminbi deposit-taking, exchange, remittance and credit cards. Individuals were allowed to take cash of not more than RMB 20,000 yuan into or out of the Mainland each time they travelled from January 2005. Over time, this has resulted in a build up of renminbi banknotes outside the Mainland. In a sense, the offshore RMB market, which took shape firstly in Hong Kong in 2010 where it had loosened restrictions and a smaller scale, was the extension of domestic forex market. Major participants included foreign trade enterprises, offshore financial institutions, hedge funds, to name a few. By the end of July 2010, Hong Kong’s RMB reserve amounted to 103.7 billion yuan. At that time, CNY and CNH both had their own separate buy, sell and mid-market rate. From August 2010 to March 2016, CNH fluctuated around the middle rate within a range consistent with that specified by the PBoC on CNY. China’s central bank expanded the two-way fluctuation rage from 0.5% to 1% in April 2012, and from 1% to 2% in March 2014. Hong Kong once had the largest offshore RMB capital pool. In its peak time at the end of 2014, over one trillion yuan was traded there. But the trading volume shrank year by ear, reaching a record low of 500 billion yuan in March 2017. LondonIn promoting RMB internationalization, China’s policymakers tend to see outbound funds, stocks, and bonds flow back to China, which may be good news to London because it is the base for most of the investors China is trying to attract. In 2011, George Osborne, the former Chancellor of the Exchequer of the UK, reached a consensus with China’s vice premier Wang Qishan in launching RMB-denominated financial products and services. One year later, HSBC issued the first bond beyond Greater China area. In 2013, London accounted for over 60% percent of all renminbi-denominated trade activity outside Chinese territory, with daily volume rising to £3.1 billion. In 2014 Frankfurt pipped London to the post by days to become the first official European renminbi clearing hub. But the UK’s hard sell worked. By March 2016 the UK became the largest clearing centre for the renminbi outside China. By March 2017, SWIFT’s data showed that 36.3% of the RMB FX transactions (excluding China) were conducted within the UK, making it the largest offshore RMB hub in the world after surpassing Hong Kong (29.3%). According to the London RMB Business Issue 6 published in January 2020, from January to November 2019, the accumulative of total RMB cross-border settlement between China and the UK gained a positive momentum of 66% YoY to RMB589.3 billion, hitting historical records.The value of new Dim Sum bonds issued increased by RMB 2 billion from the same period of 2018, an increase of 15.5%. The China Construction Bank, which was designated as the London RMB clearing bank, has reached a total clearing volume of 40 trillion RMB yuan (about 5.72 trillion U.S. dollars) since it started business in June 2014 by November 2019.
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