What is “offshore RMB” ?

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Since the start of the RMB cross-border settlement in Jul-2009,the deregulation of the RMB has been gradually carried out step by step by the China government. As a result, the offshore RMB market was established. This section mainly introduces basic knowledge about the offshore RMB.

Image of the development of RMB cross-border settlement

  1. Before 2009/Jul
  2. Before 2009/Jul
  3. Before 2009/Jul

Two RMB markets

The RMB had been used and settled only in Mainland China (onshore RMB market) until 2009. Since the start of the RMB cross-border settlement, the offshore RMB market was born and developed gradually. Currently the onshore RMB market and offshore RMB market co-exist.

Launch of the offshore RMB market

Following the start of the RMB cross-border settlement, PBOC (People's Bank of China) and HKMA (Hong Kong Monetary Authority) made an agreement in Jul-2010, referring to the RMB banking service in Hong Kong. The offshore RMB market was finally open for action.

The correlation between the onshore RMB market and
Offshoure RMB market

Offshore financial institutions can’t access the onshore RMB market except in some limited cases, while onshore financial institutions basically can’t access the offshore RMB market. That is why rates (foreign exchange, money,etc.) are normally different in the onshore RMB market and offshore RMB market (based on the difference of market
participants).

The correlation between the regulations in the Mainland and offshore RMB market

The transactions (forex, money, etc.) in the offshore RMB market aren’t principally targeted by the regulations launched in the Mainland. However the new regulations and the change of regulations may affect the movement of the rates in the offshore RMB market.

Descriptions of RMB

Generally, the market participants call the RMB transaction in Mainland China “CNY”, while they call the one in out-of-Mainland China “CNH”. However, on the global settlement system, “CNY” is only used as the currency code.

Direct foreign exchange with RMB

Based upon agreement of two governments,direct foreign exchange between home currency and RMB has been started in several regions (Japan, Malaysia, Russia etc.).

Launch of the money reference rate for offshore RMB

A reference rate for the offshore RMB (CNH) was added to HIBOR* on June 24, 2013.Its launch supported the provision of rate products in RMB including deposits, loans and rate derivatives.
*Hong Kong Interbank Offered Rate

Dim Sum Bond

“Dim Sum Bond” is the offshore RMB-denominated bond, which is issued and circulated elsewhere than in the Mainland China (mainly in Hong Kong).
Companies (including financial institutions) in the Mainland China must acquire an approval from the Chinese Authority for an issue of “Dim Sum Bond”.
On the other hand, companies outside Mainland China can issue “Dim Sum Bond” without any authorization by the Chinese Authority. However, their transfer and use of the fund in the Mainland China require an approval from Chinese Authority.

Panda bond

A Panda bond is the Onshore RMB-denominated bond from a non-resident issuer (government, corporations, financial institutions etc.), sold in the Mainland China. Following the approval by the Chinese government, the first two Panda bonds were issued in October 2005 by the International Finance Corporation and the Asian Development Bank. Although the process of issuing a Panda bond is more complicated than issuing a Dim sum bond, it can be an effective method for issuers' financing strategy when the onshore funding rate is more attractive than the offshore one. Another feature is that issuers are able to procure RMB using credibility of non-residents such as their parent companies.

CIPS

The Cross-Border Interbank Payment System (CIPS) is an RMB denominated cross-border payment system launched in 2015 by PBOC, aiming for the RMB internationalization. CIPS is superior to the existing payment system CNAPS (China National Advanced Payments System) in terms of safety and versatility, specifically a lower systemic risk by using RTGS for settlement, a wider coverage including countries in Asia & Oceania and Europe, and that it is developed in English. It also reduces the number of days and costs for settlement compared with the standard RMB cross-border settlement through Hong Kong. MUFG: Bank (China) was the first Japanese bank to receive a license to directly participate in CIPS in July 2016. Subsequently, many local banks have joined CIPS through us. MUFG: Bank will promote the CIPS network to help our customers' RMB businesses.

Bond connect

The bond connect is a new bond investment scheme developed jointly by PBOC and the Hong Kong Monetary Authority (HKMA) to mark the 20th anniversary of the handover of Hong Kong in July 2017. So far, only northbound trading has been opened, enabling international investors to purchase bonds traded on the China interbank bond market through Hong Kong. Southbound trading for mainlanders to trade in Honk Kong bonds is also scheduled to open at a later stage. Different from the previous access methods to the China bond market, the bond connect will not require international investors to open an account in China, will allow investors to execute trades with Qualified Market Makers (QMM) in China through their own dedicated devices, and will settle funds/bonds through the Central Market Unit operated by HKMA. This new framework, in which account opening and trading can be completed outside of mainland China, lowers the hurdle for entry for some investors, and the bond connect is expected to further boost the Chinese bond markets. MUFG: Bank (China) was the first Japanese bank to be licensed as QMM.

(as of Oct-2017)

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