中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
RMB internationalization: a playfield for
speculators or a platform for real economy
Lisheng Xiao
Institute of World economics and politicals（IWEP）
Dec 13, 2014
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
RMB
internationalization
Development of the
Factors driving the
Conclusions
Offshore Renminbi Market
internationalization of RMB
•The government and
•cross-border trade
•RMB as invoicing
private sector have
settlement in RMB
currency
different motivations
•offshore RMB
•RMB
to push and pull RMB
deposits
internationalization
internationalization.
•Dim sum bonds
arbitrage index
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
I. Development of the Offshore Renminbi Market
• 1.The volume of cross-border trade settlement in RMB has
increased rapidly
700
6.4
billion RMB
6.35
600
6.3
500
6.25
400
6.2
300
6.15
200
6.1
100
6.05
6
0
RMB cross-border trade settlements
Data Source：CEIC, Wind, hereinafter
RMB exchange rate(right axis)
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
I. Development of the Offshore Renminbi Market
the scale of import trade settlement in RMB exceed the export trade
settlement
500
billion RMB
450
400
350
300
250
200
150
100
50
RMB cross border export settlement
RMB cross border importsettlement
2014-09
2014-07
2014-05
2014-03
2014-01
2013-11
2013-09
2013-07
2013-05
2013-03
2013-01
2012-11
2012-09
2012-07
2012-05
2012-03
2012-01
2011-11
2011-09
2011-07
2011-05
2011-03
2011-01
2010-11
2010-09
2010-07
2010-05
2010-03
2010-01
0
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
I. Development of the Offshore Renminbi Market
the growth of offshore RMB deposits are close to the growth of net RMB
trade settlement import(import minus export).
250
80
billion RMB
60
200
40
150
20
100
0
50
-20
net RMB settlement(import-export)
HongKong RMB deposit(right axis)
2014-09
2014-07
2014-05
2014-03
2014-01
2013-11
2013-09
2013-07
2013-05
2013-03
2013-01
2012-11
2012-09
2012-07
2012-05
2012-03
2012-01
2011-11
2011-09
2011-07
2011-05
2011-03
2011-01
2010-11
2010-09
2010-07
2010-05
2010-03
-50
2010-01
0
-40
-60
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
I. Development of the Offshore Renminbi Market
Acceleration of the RMB’s offshore financial markets
1.Most of the offshore RMB bond issued by mainland government and
financial company.
2. the duration of Dim sum bonds are short. The 65% are 1-3 year.
40
billion RMB
35
30
25
20
15
10
5
0
2011/1/1 2011/5/1 2011/9/1 2012/1/1 2012/5/1 2012/9/1 2013/1/1 2013/5/1 2013/9/1 2014/1/1 2014/5/1 2014/9/1
HongKong Dim sum bonds
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
I. Development of the Offshore Renminbi Market
Offshore market lack of RMB inflow channel
• First, the total account and the growth rate of RFDI
is relatively low. There was only 62.4 billion Yuan in
May 2014.
• Second, RQFII had suffered investment income
problem.
• Third，the cross-border RMB loans are very small.
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
II. Factors driving the internationalization of RMB
Incremental opening up of the capital account
• PBC published two reports in 2012, suggesting
speeding up capital account liberalization (PBC, 2012a,
2012b);
• A more radical two-step liberalization proposal which
suggested basically liberalizing capital account by 2015,
and completely liberalizing it by 2020;
• As the 3rd plenum decision of the 18th CPC central
committee showed, RMB’s convertibility under capital
account should be accelerated;
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
II. Factors driving the internationalization of RMB
Under RMB exchange rate regime, the RMB exchange rate is
still heavily managed, lack of volatility, have unilateral
appreciation expectations.
0.025
0.02
0.015
0.01
0.005
0
2009-11-02
-0.005
2010-11-02
2011-11-02
2012-11-02
-0.01
-0.015
-0.02
-0.025
fixing
weak side
strong side
2013-11-02
2014-11-0
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
II. Factors driving the internationalization of RMB
From 2005-2014 RMB
appreciation expectation
have
persistent
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
II. Factors driving the internationalization of RMB
•Compare to AUD, RMB volatility has been extremely low,
currently standing at one fifth, which make the RMB
become one of the most attractive carry targets currencies.
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
AUD volatility
RMB volatility
Sep-14
May-14
Jan-14
Sep-13
May-13
Jan-13
Sep-12
May-12
Jan-12
Sep-11
May-11
Jan-11
Sep-10
May-10
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
Sep-06
May-06
Jan-06
Sep-05
May-05
Jan-05
0
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
II. Factors driving the internationalization of RMB
From 2009-2014, chinese financial market have relative high
interest to international financial market.
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
II. Factors driving the internationalization of RMB
The volume of cross-border trade settlement in RMB has increased
rapidly. however, the import trade settlement in RMB exceed the export
trade settlement
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
II. Factors driving the internationalization of RMB
Capital flow through Fake China export invoices. The gap between
Chinese exports to Hong Kong and Hong Kong imports from China rose
sharply from 2012.
30000
25000
20000
15000
10000
5000
Difference between mainland export to Hongkong and Hong Kong
import from mainland（million Dollar）
2014-07
2014-01
2013-07
2013-01
2012-07
2012-01
2011-07
2011-01
2010-07
2010-01
2009-07
2009-01
2008-07
2008-01
2007-07
2007-01
2006-07
2006-01
-10000
2005-07
-5000
2005-01
0
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
II. Factors driving the internationalization of RMB
•Invoice currency or settlement currency？
•Although the total amount of cross-border settled in
RMB rises rapidly, but the cross-border trades
denominated in RMB are not the same.
•the difference in the invoiced currency and
settlement currency in the cross-border trades are
mainly due to the RMB appreciation expectations.
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
II. Factors driving the internationalization of RMB
•the determinants of RMB as cross-border trade
invoicing currency
•Law 1 Grassman’s Law：Invoicing currency of trade
among industrialized countries is dominated by
export country’s currency, and then by the import
country’s currency, and slightly by the third country’s
currency(Grassman,1973,1976).
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
II. Factors driving the internationalization of RMB
•the determinants of RMB as cross-border trade
invoicing currency
•Law 2 Trade between industrialized country and
developing country is mainly invoiced by the
currency of industrialized country or of the third
country.
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
II. Factors driving the internationalization of RMB
•the determinants of RMB as cross-border trade
invoicing currency
•Law 3 Trade between homogeneous goods is
invoiced mainly by US dollar or other vehicle
currencies, while trade between heterogeneous
goods is invoiced by exporter’s currency generally.
McKinnon (1979)
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
II. Factors driving the internationalization of RMB
•the determinants of RMB as cross-border trade
invoicing currency
•In addition to above three empirical laws, we have
to consider the structure of China’s trade mode
More than half of China’s export is processing
trade,which import commodity,and export
intermediate goods,tending to be denominated in
foreign currencies.
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
II. Factors driving the internationalization of RMB
•three determinants of RMB as cross-border trade
invoicing currency
•1. the export destination .
•2. the complexity of the export products.
•3. processing trade
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
II. Factors driving the internationalization of RMB
•the complexity of the export products.
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
II. Factors driving the internationalization of RMB
•the complexity of the export products.
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
II. Factors driving the internationalization of RMB
•RMB internationalization arbitrage index
Theoretically，a carry trade investment currency
have to meet three conditions :
1) a relatively stable yield spread
2) low exchange rate fluctuation
3) high monetary liquidity.
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
II. Factors driving the internationalization of RMB
•RMB internationalization arbitrage index
We track the usage of RMB mainly through three
parameters:
(1) the RMB exchange rate (against the five other
currencies);
(2) the cross-border RMB trade liquidation;
(3) the interest spreads.
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
II. Factors driving the internationalization of RMB
•RMB internationalization arbitrage index
• the Sharpe Ratio of RMB to foreign currency:
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
II. Factors driving the internationalization of RMB
•RMB internationalization arbitrage index
•the weight is determined by the ratio of RMB
liquidation of country j to the total amount of crossborder RMB trade liquidation.
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
II. Factors driving the internationalization of RMB
•RMB internationalization arbitrage index
•the cross-border RMB index reflects the arbitrage
motivation in RMB internationalization.
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
II. Factors driving the internationalization of RMB
•RMB internationalization arbitrage index
•arbitrage index and the RMB cross-border trade
have very close relationship(Solid line and dashed
lines).
0.5
4
0.45
3.5
0.4
3
0.35
2.5
0.3
2
0.25
0.2
1.5
0.15
1
0.1
0.5
0.05
0
export denominate by RMB/total export
import denominate by RMB/total import
2014-09
2014-07
2014-05
2014-03
2014-01
2013-11
2013-09
2013-07
2013-05
2013-03
2013-01
2012-11
2012-09
2012-07
2012-05
2012-03
2012-01
2011-11
2011-09
2011-07
2011-05
2011-03
2011-01
2010-11
2010-09
2010-07
0
RMB arbitrage index（right axis）
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
II. Factors driving the internationalization of RMB
•Empirical result of the Determinants of RMB
Internationalization
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
III . Conclusions
•First, The government and private sector have
different motives to push RMB internationalization.
•Second, based on the inflexibility of RMB exchange
rate formation mechanism, the RMB international
strategy will bring about a huge arbitrage space.
•Third, the import trade settlement in RMB exceed
exports, and have a significant correlation with crossborder arbitrage index.
中国社会科学院 世界经济与政治研究所
Institute of World Economics and Politics(IWEP)
Chinese Academy of Social Sciences(CASS)
Thank you！