WHEN THE POLICIES that comprise the renminbi strategy were first launched, not many people were prepared to bet on the chances of success for a currency with limited convertibility, and thus limited international circulation, that was issued by a country with an authoritarian government and institutions that did not conform to the Western model of democratic liberalism. Many commentators, both in China and abroad, maintained that the trade settlement and offshore schemes were doomed to fail. But market participants, especially those based in Greater China and the surrounding countries, showed enough enthusiasm for this initiative to create the traction needed to keep it going. (To some extent, market participants have been more receptive to this new policy course than Chinese business leaders and scholars.)
In just over five years, what I’ve called China’s renminbi strategy has expanded from the small, low-key pilot scheme that aimed to increase the use of the Chinese currency in cross-border trade to a full-scale operational program that covers a broad policy spectrum. Using China’s trade to build a platform for the use of the renminbi and creating an offshore market infrastructure in Hong Kong—with clearing, payments, and other banking facilities to facilitate the use of the renminbi in trade and investment—the Chinese monetary authorities have set up an official channel for the renminbi to freely flow between China and its neighbors and have created a framework for what was the de facto circulation of the currency in the region—especially in China’s neighboring countries.
As a result, the renminbi circulation has “normalized,” and a well-functioning renminbi market has been created in Hong Kong. To fully appreciate the impact of this initiative, it is worth remembering that for years businessmen hauled suitcases of yuan across the border and deposited this money in banks in Hong Kong in order to be able to pay for international transactions and invest abroad. Opening a formal banking channel and, for example, encouraging Burmese jade dealers who trade in the Yunnan Province, on the border with Burma/Myanmar, to accept renminbi
1 is a positive development. However, it does not turn the renminbi into a key international currency.
The Chinese authorities, even if they continue to maintain a low profile around this initiative, have ambitions for the renminbi that are bigger than just becoming the dominant regional currency. These ambitions were evident in the huge expectations that surrounded the International Monetary Fund (IMF) deliberation in 2015 on whether to include the renminbi in the basket of currencies that provide the basis for its Special Drawing Rights (SDRs). Many in China—from scholars to journalists and businesspeople—were adamant that the renminbi deserved such recognition to cement its status as one of the key international currencies. The IMF concurred, and the renminbi is now one of the currencies in which SDRs can be exchanged (the others are the dollar, the euro, the yen, and the pound). The inclusion of the renminbi in the SDR basket was a “milestone for China,” as Christine Lagarde, IMF managing director, stressed.
2 At least formally, the renminbi is no longer a dwarf currency and has become a member of the same club as the other key international currencies.
Where does the renminbi go from here? Hong Kong provides a policy template for establishing offshore markets in other financial centers in Asia and around the world. And, given the existing restrictions on the movement of money into and out of China, it is through this expansion of the offshore markets that the country can support the international circulation and use of the renminbi. Of course, with these markets constrained by the currency’s limited convertibility, their size depends on the supply from the Chinese monetary authorities. Collaboration between the Chinese government and that of the country wishing to set up an offshore market is therefore paramount—and these countries must accept that, at least for the time being, there is limited opportunity to develop a pure offshore market. This need for collaboration inevitably adds a political element to what appears to be a mere technical and commercial issue, so it’s no surprise that the other renminbi offshore centers are in countries that are in China’s sphere of influence (even Taiwan, given the scale and scope of its trade relations with the mainland) or have friendly commercial and diplomatic relations with Beijing.
In this chapter, I look at how China’s renminbi strategy has extended beyond China, creating the conditions for greater circulation of the Chinese currency within, and beyond, East Asia—and even beyond the borders of Asia as a whole. The renminbi has increased its international circulation and is now much more firmly on the international map. But the numbers remain tiny outside Asia, and the drawbacks and constraints suggest (as I discuss in the second half of this chapter) that the next development for the renminbi may be beyond the offshore market.
EXPANDING THE OFFSHORE BUSINESS
Hong Kong plays a critical role in developing the international use of the renminbi. The successful development of its offshore market has increased competition and created the incentives—or the push—for other financial centers, in both Asia and Europe, to get in on the growing renminbi market. To date, a dozen financial centers have established renminbi offshore markets. With the exceptions of Toronto and Doha, all are in the Asia-Pacific region—Sydney, Kuala Lumpur, Singapore, Seoul, Taipei, and Tokyo—and in Europe—London, Frankfurt, Luxembourg, Paris, and Zurich. The number of clearing banks has grown as well; there are fourteen across the world, including one that opened in Chile in May 2015, becoming the first in Latin America, and one that opened in Qatar in April 2015, becoming the first in the Middle East.
Given the importance of China in the world economy, being part of the growing renminbi business is critical for leading international financial centers as well as for regional financial centers based in Asia. In particular, financial centers that aspire to be more integrated into China’s regional expansion feel the urge to respond to the growing demand for renminbi trading and thus to be active and participate in the renminbi offshore market. This is particularly relevant for Singapore and Taipei, which, for different reasons and with different dynamics, are in competition with Hong Kong. For Singapore the head-to-head competition with Hong Kong is to be the leading financial center in Asia—and one of the most important in the world. For Taipei, the competition is more regional, and the renminbi business is related to Taiwan’s trade relations with mainland China. China’s renminbi strategy has had an impact on both centers (although to a much lesser degree than on Hong Kong), and they are now the largest offshore markets for the renminbi after Hong Kong. The renminbi banking business is critical to both—Singapore’s bank deposits totaled almost 200 billion renminbi at the end of December 2015, and Taipei’s totaled more than 370 billion renminbi at the end of January 2016. Both centers have a clearing bank—the Industrial and Commercial Bank of China in Singapore and the Bank of China in Taipei—and this allows banks incorporated in both centers to open renminbi accounts.
Singapore has a strong advantage over other financial centers in the international foreign exchange market and in the commodity trading market. It is also an enclave for Association of Southeast Asian Nations (ASEAN) countries and is part of an extensive trading network in the region—about 55 percent of Singapore’s trade consists of transactions within Asia. As a result, it can offer a platform from which Beijing can facilitate a wider use of the renminbi in China-ASEAN trade. Companies and individuals can now open renminbi accounts with participating banks in Singapore, and these banks can make and receive payments in renminbi for cross-border trade transactions. (Before the renminbi clearing services were allowed in Singapore, most offshore renminbi clearing was conducted through Hong Kong.)
According to a survey published by HSBC, approximately 15 percent of companies in Singapore use renminbi to settle cross-border business.
3 The average daily turnover in renminbi foreign exchange almost doubled over the course of its first year of operation, from $16 billion in March 2013 to $31 billion in December 2013. Singapore has also issued renminbi-denominated bonds worth a total of 7.5 billion renminbi, and several banks now offer renminbi-denominated bonds. HSBC leads the pack with the issuance of a two-year bond, at 2.25 percent, for a total amount of 500 million renminbi.
Taipei is a smaller financial center than Singapore and Hong Kong, but it has a key competitive advantage over these financial heavyweights: deep and extensive trade links with the mainland.
4 The depth and scope of business relations between mainland China and Taiwan drive the renminbi business and generate liquidity for the renminbi offshore market. Improved relations between Taipei and Beijing resulting from three memoranda, including the Cross-Strait Financial Supervision Memorandum of Understanding,
5 and the opening of the renminbi channel have made it easier for Taiwanese companies to access the mainland’s capital markets. As of 2013, Taiwanese banks could take renminbi deposits, and the renminbi clearing channel helps banks and trading companies move funds from the renminbi trade settlement scheme faster and at lower costs. As a result, the monthly growth rate of Taipei’s renminbi deposits hit a record high at 45 percent in February 2013.
6The renminbi can now be traded in other centers in Asia, such as Tokyo and Seoul, where the renminbi exchange rate can be quoted, respectively, against the Japanese yen and the Korean won. The yen and the won are also now directly tradable in the foreign exchange market in Shanghai. In principle, direct trading can reduce the dependence on the dollar in trade between these nations, but liquidity is still limited. (In the case of the South Korean market, this is partly due to the fact that the direct trading between the renminbi and the won was launched only in the summer of 2014.) Market participants that conduct large transactions still prefer to use the dollar as the vehicle currency to settle trade. In particular, the use of renminbi to settle bilateral trade between China and Japan remains very limited because of tensions around the Senkaku or Diaouy Islands in the East China Sea.
7Trade is the key trigger for the expansion of the renminbi business in Asia. This is hardly surprising, given the depth of China’s trade and financial relations with its neighbors. But even though Britain is China’s second-largest European trade partner (especially for Chinese exports) after Germany,
8 it is finance rather than trade that explains the development of the renminbi offshore market in London—and outside Asia, in particular. The development of a global market for the renminbi in London means that China is moving beyond its Asian regional strategy and beyond the development of a regional currency.
London, at the crossroads of Asia, Europe, and North America, is the world’s leading international financial center. It offers many advantages: its time zone, a sound legal system, a comprehensive regulatory framework, a broad and deep pool of talented professionals, a considerable track record of innovation and risk management, and the experience of developing the eurodollar market.
9 Even better, in China’s case, the bulk of Chinese commercial banks have a presence in London. London is already an important center for renminbi foreign exchange trading, with a 67 percent share of the global renminbi offshore spot market at the end of 2014.
10London accumulated huge expertise in offshore finance when it developed the eurodollar market in the 1960s and 1970s. The establishment of that market, however, took a fundamentally different path from the Chinese authorities’ renminbi development. It was triggered by British banks’ attempts to avoid pound exchange controls and by U.S. banks’ attempts to avoid domestic regulation—so it was market led.
11 The renminbi offshore market, on the other hand, is policy led, requiring the British Treasury and the City of London (the local authority responsible for developing the financial center) to work in close concert with the authorities in Beijing and Hong Kong.
This joint work kicked off in September 2011, at the Fourth UK-China Economic and Financial Dialogue, when UK Chancellor of the Exchequer George Osborne and China Vice-Premier Wang Qishan announced their collaboration on developing the renminbi offshore market in London. This was followed by the launch of a private-sector forum to enhance cooperation between Hong Kong and London; this has become a key semiannual event, allowing policy makers at the British Treasury and the Hong Kong Monetary Authority to formulate policy suggestions for Beijing on how the market can be developed. As a result of this dialogue, London’s market has developed along the same format as Hong Kong’s. It now has checked all the boxes required for the offshore market: a clearing bank, a swap agreement with the People’s Bank of China (PBoC), and a bond market.
Although the renminbi business in London is growing at a strong rate (approximately 37 percent annually, fueled by the increase in corporate deposits), it remains relatively tiny. The pool of renminbi—about 50 billion renminbi in bank deposits at the end of January 2016; approximately half of these renminbi are in corporate accounts
12—is a fraction of the renminbi deposits in Hong Kong and even in Singapore. As for the bond market, HSBC took the lead in April 2012, raising 2 billion renminbi in the first renminbi bond issuance outside mainland China and Hong Kong. Approximately two-thirds of the three-year bonds (paying 3 percent interest) went to European investors; the rest were bought by Asian investors.
13 There were other firsts, from the largest renminbi bond issuance in an offshore market (that bond, worth 2.5 billion renminbi, was issued in January 2014 by the Bank of China) to the first non-Chinese sovereign bond (that bond, worth 3 million renminbi, was issued by the British government in October 2014 to finance official reserves; until then, Britain held only U.S. dollars, euros, yen, and Canadian dollars in its reserves).
14 But so far, these issuances total only about 29 billion renminbi.
15 They have been mainly symbolic, highlighting the joint efforts of the United Kingdom, mainland China, and Hong Kong in creating the renminbi offshore market,
16 the strength of their commercial and diplomatic relationships, and China’s financial integration with the West.
17 However, they have done little to drive market demand for renminbi-denominated bonds.
Still, Britain has very little to lose—and much to gain—from being involved in China’s renminbi strategy and promoting the use of the Chinese currency in London. These gains are clear—more diversification, a stake in a potentially large market, and stronger commercial and diplomatic relations with China. Above all, there is no threat to the pound. As a British senior civil servant told me, it is not only about supporting the renminbi but also about engaging with China on trade and investment: it is a “joint-up” policy.
THE UNITED STATES TRAILS BEHIND
The same logic applies to many European centers that have recently opened to the renminbi business. Renminbi-denominated bonds have been listed in Luxembourg, Paris, and Frankfurt and have been traded on the over-the-counter market. Luxembourg has built a highly competitive position in this market as host to the European headquarters of the Industrial and Commercial Bank of China, Bank of China, and China Construction Bank. It boasts the largest pool of renminbi in Europe in terms of deposits, loans, listed bonds, and assets in mutual funds. It also serves as the main hub and entry point into the euro area for Chinese investors. As for Frankfurt and Paris, their advantage lies in their countries’ close trade ties with China. For instance, German companies now have access to the onshore and offshore renminbi bond markets—Daimler was the first European company to issue bonds on China’s interbank market.
18The stake for the United States, on the other hand, is much higher. The renminbi is in direct competition with the dollar, and there are geopolitical as well as commercial implications to a rising renminbi. And, as was evident during President Xi Jinping’s state visit to Washington, D.C., in September 2015, the relationship between the two countries is rather frosty, especially around issues such as censorship, cybersecurity, and the South China sea. It is not surprising, then, that there is no operational renminbi center in the United States, and the Obama administration did not make any provision for U.S. participation in the renminbi market. As a result, despite having the largest financial markets and some of the biggest banks in the world, the United States accounts for less than 13 percent of renminbi offshore foreign exchange transactions outside China. Individuals and businesses in the United States can trade renminbi in many banks, including Chinese banks—but the Bank of China puts a limit of $4,000 per day (and $20,000 per year) on the amount that a U.S.-resident individual can convert.
The United States has not intervened in the debate about China’s renminbi strategy and was especially careful not to openly discuss, in the months preceding the IMF revision of the composition of the SDR basket, whether the renminbi should be included or not. After the rebuff of Britain for having joined the Beijing-led Asian Infrastructure Investment Bank, U.S. policy makers have avoided saying anything that could add more tension to an already strained situation or that Congress could use in its “China bashing.” (China’s efforts to internationalize its currency had reduced Congress’s attacks in recent years, but in 2015, the weakness of the renminbi once again triggered accusations of currency manipulation.) However, in my one-on-one and off-the-record conversations, I have heard these policy makers express concerns about Chinese companies being allowed to raise capital offshore and about the inadequacy of the channels that the PBoC has recently made available to the Chinese market. From their point of view, collaborating with the Chinese monetary authorities to set up an offshore market for the renminbi in the United States does not make sense because of what it would be perceived as a direct threat to the dollar and the possible savage reaction from Congress that this would trigger—even if the impact on the dollar is likely to be negligible.
The conspicuous absence of the United States in the renminbi offshore market has created an opportunity for Toronto (where a renminbi offshore center and clearing bank were created in 2015) to become the leading renminbi center in the Americas. Vancouver could follow Toronto’s lead. Like most other economies, Canada sees the internationalization of the renminbi as an opportunity to deepen the bilateral economic relationship with China—its second-largest trade partner—as well as to position itself as North America’s premier renminbi financial hub. Engaging with China in the renminbi market is thus a foreign policy issue as well as an opportunity for local capital markets.
As this burgeoning global expansion demonstrates, China has had considerable success in developing its renminbi initiative from a small pilot scheme to a much more complex policy framework. As I discussed in
chapter 6, one of the objectives of the renminbi strategy is to encourage the international circulation of the renminbi and narrow China’s dependence on the dollar. It has indeed been able to increase the international use of its currency without fully liberalizing capital movements. More than 20 percent of China’s imports and exports (worth around 1.65 trillion renminbi) are now settled in renminbi,
19 compared with 2 percent in 2010—and zero in 2009.
20 In March 2016, the renminbi unseated the Japanese yen from the fourth position among the world’s top ten payment currencies, with almost a 2 percent share of global payments; only a few years earlier, in January 2013, the renminbi ranked thirteenth.
21 The renminbi is now the second-most-used currency, after the dollar, in international trade finance. It is used to settle approximately 9 percent of total trade finance—letters of credit and collections—up from less than 2 percent in January 2012.
22 And at the end of November 2015, the IMF announced the inclusion of the renminbi in the SDR basket.
However, the renminbi’s increased circulation has not reduced China’s dependence on the dollar. Actually, since the launch of the process of internationalization, the pace at which dollars have accumulated in China’s foreign exchange reserves has accelerated. Between the end of 2010 and the end of September 2014, China’s reserve holding of dollars grew by 50 percent, reaching a record $4 trillion (although it subsequently dropped by 20 percent to $3.2 trillion in May 2016, due to a rise in capital outflows and the PBoC’s need to manage the value of the renminbi). So China has achieved part of its first objective, but its promotion of the renminbi as an international currency has not yet helped it decrease its dependence on the dollar.
China’s other objectives with the renminbi strategy are to remove the exchange rate risk and reduce transaction costs, expand the scope of the renminbi business beyond the range of regional trade and support Chinese enterprises that go out, and develop market infrastructure and expand the market for the renminbi. It has had similarly mixed success with each of these goals.
The renminbi trade settlement scheme provides a way for Chinese businesses to remove the exchange rate risk and lower transaction costs. We know how much trade is now settled in renminbi, but when we try to determine how much of China’s trade has been priced and invoiced in renminbi, the figures are murky. The majority of Chinese firms continue to price trade transactions in dollars—meaning that the exchange rate risk remains. It is also difficult to measure whether transaction costs for Chinese businesses have fallen—it may even be the case that the renminbi trade settlement scheme pushes them up because (as often happens with China’s policy experimentation) the scheme is heavy on rules and requirements, which can generate extra costs. For instance, applications to schemes such as QFII take two to four months to be processed; many enterprises regard the time and money spent preparing these as an unnecessary burden.
As for expanding the scope of the renminbi and helping Chinese firms to go out, success has mainly been regional, with a significant increase in the use of the Chinese currency in both trade and financial transactions within the region. Seven out of ten countries in Asia—including South Korea, Indonesia, Malaysia, Singapore, and Thailand—have tracked the renminbi more closely than the dollar in the past three years.
23 This is consistent with China’s position as the center of East Asia’s production and investment and as the key hub within the regional supply chain. China trades about $1.4 trillion worth of goods a year with neighboring countries.
24 About 22 percent of its manufacturing trade is now with East Asian countries, up from 2 percent in 1991. For some of these countries, China is the largest trade partner. For instance, 20 percent of Vietnam’s trade is with China, although Vietnam accounts for less than 1 percent of China’s trade—and the country’s trade deficit with China is rising.
25 New initiatives, such as the New Silk Road (also known as Belt and Road), are designed to help Chinese firms “go out” and to expand the international use of the renminbi. The impact of these measures is evident in China’s overseas investment, which increased by more than 70 percent in the first two months of 2016, to a total of approximately $30 billion (within this, investment in the New Silk Road increased by 40 percent, to $2 billion).
26Finally, although the renminbi market has grown rapidly, it still remains quite limited in terms of size and scale. Growth has been concentrated mainly in Hong Kong. The outstanding stock of renminbi lending there is approximately 35 percent of total lending—or about half a trillion renminbi. The outstanding stock of renminbi liquidity in Hong Kong (bank deposits) is approximately 800 billion renminbi. The other centers significantly trail behind.
All in all, the renminbi is mainly a regional currency. China’s trade in the region provides traction for the renminbi offshore market, which builds on the renminbi circulation in Greater China and its surrounding countries.
27 Not surprisingly, then, the largest and most diversified offshore markets for the renminbi are, in fact, in Asia—Hong Kong, Singapore, and Taipei—whereas markets in other regions and in other emerging countries (for example, South Africa and Brazil) have developed at a much slower pace.
28 So far, the renminbi strategy has promoted currency regionalization—“Asianization” rather than internationalization.
PROBLEMS WITH THE SCHEME
The implementation of the renminbi strategy has had some undesirable consequences. For instance, since 2011, cases of arbitrage and speculation have increased, forcing the PBoC to absorb the inflows and accumulate even more dollars. Indeed, some enterprises from the mainland have turned their access to both onshore and offshore markets into an opportunity for arbitrage between the two, exploiting the differences in the exchange rates vis-à-vis the U.S. dollar. Since 2011, importers based in the mainland have been able to profit from the difference between the domestic exchange rate for the onshore nonconvertible renminbi (CNY) and the offshore fully convertible renminbi (CNH). Because the dollar was cheaper in the offshore market, firms could make a profit by buying dollars and selling renminbi in the offshore nondeliverable forward market and selling dollars and buying renminbi in the onshore market. Demand went up, supporting the use of the renminbi, creating a circle of demand and appreciation: more inflows led to more appreciation, and more appreciation attracted more inflows to profit from the “one-way bet” on the currency. The PBoC had to intervene to absorb dollars in order to manage the exchange rate and make renminbi available to meet demand, thus expanding its dollar reserves. (The weakening of the exchange rate in 2015 staunched such arbitrage activities.)
Differentials in the exchange rates between the CNY and the CNH tend to signal underlying market pressures on the currency. An onshore interest rate above that of its offshore counterpart indicates appreciation pressures on the CNY, whereas an onshore rate below that of its offshore counterpart indicates depreciation pressures. These differentials are also a consequence of inefficient capital controls that segment the onshore and offshore markets—for instance, a higher exchange rate in the onshore market indicates that capital inflows have not been stemmed effectively. The result is that capital flows in without offsetting changes in the current account.
29Although China has tried to control these “hot money” flows (short-term, speculative capital flows) into the mainland market, firms have found ways around the existing restrictions. The renminbi trade settlement scheme provides the main, and the legitimate, mechanism by which to transfer money between Hong Kong and the mainland: it supports these flows only if they are used to pay for goods—not if they are used for speculative purposes. But by overinvoicing, firms can sneak in money for speculation. For instance, a mainland company that sells goods to its Hong Kong subsidiaries can deliberately overcharge for its exports in order to bring more renminbi into the mainland than the trade transaction would require. One popular method is to inflate export invoices on goods that are difficult to value—such as electronic circuits—and then transform speculative cash into trade receipts and convert dollars into renminbi under the current account. Hence, a portion of this money is brought into mainland China for purely speculative purposes—that is, to profit from the differences in the exchange rates—but it is disguised as a payment for goods.
30 Although the former is illegal, the latter is legal.
The difference between China-reported exports to Hong Kong and Hong Kong–reported imports from the mainland—the so-called invoicing gap—provides an estimate of the disguised capital flows into the mainland. The invoicing gap peaked in the last quarter of 2012, a few months after the expansion of the renminbi trade settlement scheme, when the amount of renminbi used for import settlement was twelve times more than that used for export settlement. Even assuming that importers would be more easily persuaded than exporters to use the renminbi—for example, getting easier access to the Chinese market can be a significant incentive for many foreign firms—the gap is considerable and is explained by the strength of the Chinese currency until late 2014. The differences have narrowed considerably since then, and this narrowing has coincided with the weakening of the renminbi.
31Another drawback of the strategy as it has been implemented is Beijing’s control of the liquidity in the offshore market. Although this is not a problem for Hong Kong, it is more of a constraint for London and other international financial centers outside China’s jurisdiction that plan to be part of this market. The private sector may feel frustrated if it is unable to respond to and satisfy underlying demand for renminbi and renminbi-denominated assets—if and when demand picks up. There is therefore a potential conflict between China’s strategy and what the private sector wants. The official statements from the UK government and the Bank of England hint at these concerns. As the Bank of England notes, “There might be scope for the official sector to play a catalysing role at the margin, but the key arbiter in determining if such a market develops will be whether the private sector can identify and satisfy any underlying demand for RMB denominated securities.”
32BEYOND THE OFFSHORE MARKET: THE FREE MARKET ZONE
China has had to figure out ways around the shortcomings of its current strategy. As I discussed in
chapter 6, China’s renminbi strategy was originally designed to temporarily develop the international use of the Chinese currency during the transition to the full liberalization of capital movements. Thus, the offshore market was never intended to be a permanent solution. In fact, back in 2010, China’s monetary authorities considered the offshore market to be a temporary measure to provide the first steps toward the internationalization of the renminbi; in their view, the full liberalization of the capital account would eventually provide traction to the currency and make the offshore market (at least the policy-driven offshore market) unnecessary.
But it soon became clear, as I will discuss in details in the next chapter, that China was not ready to open its capital account. So, since the new leadership took over in March 2013, China has embarked on a new round of policy experimentation to liberalize capital movements under restricted conditions and thus to control money inflows and outflows. These policies go beyond the offshore market to include, for example, special economic zones. In the words of Sebastian Heilmann, these zones are the trademark of China’s “experimentation under hierarchy.”
33 They offer both local and central levels of government a way to test policies on the exporting and importing of manufacturing goods, land auctions, wholly foreign-owned companies, and labor-market liberalization, and they have helped the authorities to detect problems and make adjustments before turning these policies into broad-scale operational programs and extending them to the rest of the country.
34The first special economic zones were created in Guangdong, Fujian, and Hainan in the 1980s. By 2007, seventy-two cities had the status of “experimental point for comprehensive reform.”
35 The free trade zone is a recently added type of special economic zone and is an experiment in financial opening. In 2012, a free trade zone was established in Qianhai (a district of Shenzhen) to serve as a financial hub that would push the internationalization of the renminbi. This initiatitive has not quite picked up, but it has, in fact, fully liberalized capital movements in China’s domestic market in designated areas and within controlled conditions. The Shanghai free trade zone, established the following year, was designed to offer more channels to capital flows beyond the offshore market. These zones give the authorities the opportunity to test their new policies before extending them to other areas of the country, fine-tune the quotas on the basis of domestic financial conditions, and become more familiar with the management of capital movements before fully liberalizing China’s capital account.
Through free trade zones and other measures, such as the Shanghai–Hong Kong Stock Connect, which links the stock exchanges of the two financial centers, China has found ways to expand the renminbi strategy—and China’s financial opening—beyond the offshore market. And that, of course, was the idea all along—that steps like the trade settlement scheme and the offshore markets would help pave the way for the full liberalization of capital movements.
But this is no longer so certain. In the next chapter, I will consider the way forward for reforms as they are essential to China’s full financial opening. I will then explore the debate among Chinese policy makers and scholars on whether the full liberalization of China’s capital account is necessary to turn the renminbi into a full-fledged international currency.