Internationalization of RMB should respect market’s roles

The internationalization of renminbi should respect the market’s roles and reduce its reliance on government actions, says an article from the 21st Century Business Herald. Excerpts:

China signed renminbi clearing and settlement memorandums of understanding with the United Kingdom and Germany recently. The internationalization of renminbi takes another step forward.

The booming renminbi offshore centers in China’s Hong Kong, Shanghai and Taiwan, as well as in Singapore have attracted more developed countries to join the competition.

However, unlike the market-centered US dollar market in the Europe, the offshore renminbi markets under construction are based on bilateral local currency swap agreements between central banks of China, and the other countries and regions. The trade clearing and settlement are mainly carried out by the special financial agencies appointed by the governments.

The selection of renminbi centers is performed by the governments, and there isn’t competition among the centers.

Compared with the mature US dollar, renminbi is not yet an international currency, and its pricing is still strongly affected by the green backs.

The United States has developed financial markets, especially a mature bond market, which ensures resource distribution in its offshore financial market is conducted according to market rules.

The bond markets in China are much less developed. There is still a long way to go for China to improve its resource distribution efficiency and risk pricing mechanism. The tight control of capital accounts and the interest rate market also restricts the growth of the renminbi offshore market.

The unpredictability of renminbi assets’ credit lowers the attraction of renminbi assets in abroad.

The internationalization of renminbi still relies on its appreciation against the US dollar. The interest arbitrage based on exchange rate of renminbi will dwindle, because the currency’s value to the US dollar fluctuates. This is not good for the internationalization of renminbi.

In this sense, the wide spread of renminbi’s offshore trade centers cannot avoid the possible issues associated with renminbi assets’ pricing. That is to say, once renminbi has different pricing in different offshore markets, renminbi can probably follow the footsteps of the yen, which has become a pure arbitrage currency. This is the trap of yen’s internationalization.

The government must not underestimate the management and control costs behind such a global offshore market system that is built artificially, instead of maturing in market ways.

The cooperative and complementary relations between the supervision and market can easily evolve into a cat-and-mouse game.