Central Bank Report: Expanding The Use Of RMB in Foreign Trade And Investment

On the 23rd, the website of the People's Bank of China released the Report on the Internationalization of RMB in 2022 (hereinafter referred to as the Report), specifying that in the next stage, the use of RMB in foreign trade and investment will be expanded; Further, facilitate foreign investors to invest in the Chinese market and enrich the types of assets that can be invested.

The offshore RMB interest rate is generally stable

According to the Report, since 2021, the offshore RMB interest rate has been generally stable, the differentiation of terms has become obvious, the volatility of overnight interest rate has further increased, and the long-term interest rate has been generally stable.

Data shows that by the end of 2021, the overnight and seven-day fixed offer rates of the Hong Kong interbank RMB offered rate (HIBOR) were 6.93% and 2.57%, respectively, up 290 basis points and down 39 basis points compared with the end of the previous year; The three-month, six-month and one-year interest rates were 2.99%, 3.07%, and 3.16% respectively, up 10, 13 and 9 basis points from the end of 2020.

In 2021, the offshore market interest rate will be higher than the onshore market as a whole, and HIBOR will be 0.45 percentage points higher than the Shanghai Interbank Offered Rate (SHIBOR) on average. The 1-month and 3-month spread between HIBOR and SHIBOR widened from 30 and 31 basis points in the first half of the year to 70 and 71 basis points in the second half of the year.

The report also mentioned that in 2021, the offshore RMB exchange rate will fluctuate significantly in both directions, basically in line with the onshore RMB exchange rate, and the offshore and onshore exchange differences will be generally stable.

The data shows that in the first half of 2021, the offshore RMB exchange rate will rise as a whole, with a maximum of 6.36; In the second half of the year, the offshore RMB exchange rate was generally stable, closing at 6.36 at the end of the year, up 2.2% from the end of the previous year.

In addition, the number of trading days during the year when the offshore RMB exchange rate is stronger or weaker than the onshore RMB exchange rate is roughly the same. The average daily offshore onshore exchange difference throughout the year was 64 basis points, 50 basis points smaller than that in 2020.

Promoting the virtuous circle of RMB onshore and offshore markets

Outlook and adjustment for the new stage

The Report mainly discusses the development direction of the RMB market in the future from four aspects:

First, expand the use of RMB in foreign trade and investment. In recent years, the endogenous demand for market entities to use RMB in cross-border trade and investment to reduce currency mismatch risk has been rising. In order to better meet the market demand, we need to continue to do a good job in system design, policy support, and market cultivation, strengthen the coordination of local and foreign currencies, and support market entities to use more RMB in foreign trade and investment.

At the same time, we will further promote the pilot project of integrating the local and foreign currency capital pools of transnational corporations. Focusing on the construction of the pilot free trade zone (free trade port), the Guangdong Hong Kong Macao Greater Bay Area, and the Shanghai International Financial Center, we will promote the innovation of cross-border investment and financing business in RMB, and constantly improve the willingness of domestic and foreign market players to use RMB in trade and investment.

Second, steadily promote the two-way opening of financial markets. We will promote the transformation of the financial market to an all-around system-oriented opening and improve the liquidity of RMB financial assets. Further facilitate overseas investors to invest in the Chinese market, enrich the types of assets that can be invested, and facilitate overseas investors, especially central bank institutions, to allocate more RMB assets. We will support overseas entities to issue Panda Bonds, and continue to do a good job in the pilot work of the cross-border financial channel in the Guangdong Hong Kong Macao Greater Bay Area.

Third, we will continue to deepen monetary and financial cooperation with the central bank. We will continue to steadily promote bilateral local currency swaps and local currency settlement cooperation between central banks, give full play to the role of currency swaps in supporting the development of the offshore RMB market and facilitating trade and investment and explore Research cooperation with other ASEAN countries and neighboring countries. We will promote direct transactions of RMB against the currencies of relevant countries, and support overseas countries and regions to develop local RMB foreign exchange markets.

Fourth, support the healthy and orderly development of the offshore RMB market. Give full play to the role of the standing currency swap arrangement with Hong Kong, China, and provide long-term stable RMB liquidity for the RMB market in Hong Kong. We will continue to improve the offshore RMB liquidity supply mechanism, stimulate market players to innovate and develop products and services in the offshore RMB market, enrich the offshore RMB product system, and promote the formation of a virtuous circle between the onshore and offshore RMB markets. Optimize the layout of RMB clearing banks, strengthen policy support for clearing banks, and give full play to the positive role of clearing banks in cultivating the offshore RMB market.

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