Discussion of “Will the renminbi emergeas

an international reserve currency?”

by Jong-wha Lee

Dong HE
Executive Director (Research)
Hong Kong Monetary Authority
31 May 2010
* The views expressed here do not represent those of the Hong Kong
Monetary Authority.

The views expressed in this paper are the views of the author(s) and do not necessarily reflect the views
or policies of the Asian Development Bank (ADB), or its Board of Directors or the governments they
represent. ADB does not guarantee the source, originality, accuracy, completeness or reliability of any
statement, information, data, finding, interpretation, advice, opinion, or view presented, nor does it make
any representation concerning the same.
 Argument of Lee’s presentation

A more diversified global reserve system is desirable

The renminbi has the potential to become a major international

reserve currency, but policy support is necessary

Regional monetary cooperation is a vital first step

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 Significance of the project

Addresses a very important policy issue

Lively debates on-going within China, but much confusion remains

Expected to add value to policy deliberations

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 Focus of my discussion

Rationale of currency internationalisation

– How do you convince policy makers this is something worth
pursuing?
– What are the risks? How to manage such risks?

How to achieve currency internationalisation?

– Market forces vs official policies; relationship between capital
account liberalisation and currency internationalisation
– Onshore vs. offshore markets
– The role of regional cooperation

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 Rationale of currency internationalisation

Reduce the systemic risks in relying on one predominant reserve

currency for settling international trade

Reduce currency mismatch in China’s international balance sheet
– Foreign claims on China predominantly denominated in
renminbi
– Foreign liabilities to China predominantly denominated in US
dollar (wouldn’t it be nice for US Treasury bills and bonds to be
denominated in renminbi!)

He and McCauley (2010) discusses policy options to manage risks
associated with offshore use of the domestic currency

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 Market forces vs official policies

The Mainland authorities are likely to proceed cautiously and will

strive to achieve a good balance between containing potential risks
on the one hand and reaping the benefits of wider international use
of the renminbi on the other

In particular, they are likely to retain significant restrictions on

currency conversion by non-residents through the capital account,
but allow the accumulation of renminbi positions by non-residents
through trade settlement

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 The benefits of offshore markets

Such renminbi positions can be held or invested through banks and

markets located offshore, or invested onshore for certain officially
sanctioned purposes (e.g., FDI)

To international investors, investing in renminbi positions in the

offshore markets allows them to separate currency risks from
country risks, and to operate in familiar and convenient locations
(e.g., legal and regulatory environment, accounting practices,
language, time zone, etc.)

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 The importance of offshore markets for
the US dollar

The development of offshore markets of the currency is
integral to the broad strategy to internationalize the currency

In fact, one may argue that without the offshore markets, the
US dollar would not probably have attained as dominant a
position in international trade and payments as it occupies
today

Even nowadays, when foreigners use the US dollar for trade
and investment activities, the majority of the transactions are
concentrated in international financial centres such as the
euro-dollar markets in London, not onshore in New York City

And, the most well-known benchmark interest rate of the US
dollar, the London Inter-Bank Offered Rate, or the LIBOR, is
an offshore rate, not an onshore rate

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A roadmap for renminbi internationalisation

The degree of convertibility of the renminbi is best seen as a
spectrum, not black or white

This spectrum would allow non-residents to use the renminbi
for trade invoicing and settlement, borrowing and investing
through offshore markets, and have access to the onshore
markets under certain specified conditions

Such a roadmap would be consistent with a strategy of capital
account liberalization that is characterized as “Proactive,
Controllable, and Gradualist”

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 The development of renminbi banking
in Hong Kong

Hong Kong was the first place outside Mainland China to provide
renminbi banking services since 2004

Because of the willingness and ability of Hong Kong monetary

and regulatory authorities to cooperate closely with their
counterparts on the Mainland, Hong Kong is the ideal offshore
jurisdiction to provide a reliable testing ground for the
international use of the renminbi

Gradual and steady expansion of business scope, markets and

products

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 Regional monetary and financial
cooperation

How will the use of ACU relate to the regional use of
renminbi?
– Needs to be elaborated

No doubt further financial integration in the region will

facilitate the development of financial markets and products in
the region, and provide opportunities for renminbi to be used in
the region

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Thank you for your attention!