Hong Kong and the Internationalisation of the RMB

ABSTRACT: The Chinese currency, Renminbi Yuan (RMB), has had restricted convertibility outside the mainland, namely in Hong Kong, from early 2004. From July 2009, much wider convertibility has been permitted, with the RMB being used as a cross-border trade settlement currency. This paper attempts to assess the factors that have motivated RMB internationalisation, and the role Hong Kong has played in the process, against the background of China’s evolving foreign exchange markets and the RMB exchange rate benchmarking to the Hong Kong market. It shows that China’s ultimate goal of full convertibility of the capital account has provided the underlying motivation for RMB internationalisation, and that the 2008 global financial crisis acted as a catalyst in the process. With the political blessing of the central authorities and its extensive business and financial links with the mainland, Hong Kong has gradually established an RMB offshore market to supplement capital account liberalisations on the Mainland. The prospects for RMB internationalisation will be determined by the growth of the Chinese economy, reinforcing flows of RMB funds between the offshore Hong Kong and onshore Shanghai markets, and the balanced development of these two markets.