Research On The Formation And Development Of The CNY Offshore Market In Hong Kong

The formation and development of CNH (the CNY Offshore Market in Hong Kong) is an important part of the strategy of the RMB internationalization. CNH is gradually formed under the Chinese government policy and it belongs to the local currency offshore financial markets. This paper is divided into seven parts:Section one is the introduction. It describes the background and significance of the research and the literature review. Then it points out the study methods and structural arrangement, the innovation and shortcoming of this paper.Section two summarizes the development and changes of the international offshore financial market after World War â…¡. The definition basis of offshore financial evolves into the separation of inside and outside of the financial regulatory system or the financial operation system from the frontier or border. Division of the offshore financial market types from the different angles, including the way of formation, the type of currency. From the point of view of the relationship between the transaction currency and the market location, offshore finance can be divided into local currency offshore financial and foreign currency offshore financial. The operation and regulation mode and the offshore interest rate system of international offshore financial market could provide the development experience for CNH.Section three discusses the background, the process and the particularity of CNH. The needs of the RMB internationalization strategy, the international financial situation such as the global offshore financial sustained growth trends and the favorable conditions of the environment and well-developed financial system of Hong Kong are the important background. From2003to2012, the process of building of CNH includes three phases: the infancy, the formation and the overall construction. The particularity of CNH reflects the aspects of the cause, the operation pattern and supervisory pattern.Section four discusses the structure of CNH. The growth rate of offshore RMB deposits will decline, and the proportion of RMB enterprise deposits in Hong Kong will continue to rise. The policy factors, the RMB expected appreciation and RMB backward channel are the important factors for the offshore RMB loan business. Offshore RMB deposit and lending interest rates will rise. The scale of offshore RMB bond will rise, its secondary market is expected to be rapid development and more mainland enterprises will come to Hong Kong to issue RMB bonds. The pricing mechanism of RMB offshore bonds will be improved. The development of offshore RMB stock market in Hong Kong is slow. Hong Kong's offshore RMB spot and forward foreign exchange market is developing rapidly, but they are limited by the policy factors. Hong Kong's offshore RMB products are including the offshore RMB financial derivative products and financial investment and financing products. The income of the offshore RMB products, the RMB exchange rate expectations and the related control policy are the important factors for the development of offshore RMB products market.Section five analyzes the affect of the formation and development of CNH. The offshore RMB exchange rate guides the onshore RMB exchange rate, mainly in the spot and short-term contracts. However, it is not a significant impact about the offshore RMB interest rate on the onshore RMB interest rate. The RMB backflow channel could significantly increase the size of the domestic money supply, but other channels could not, such as foreign-invested enterprises FDI and trade settlement by RMB. The development of CNH will enhance the position and strength of Hong Kong as an international financial center, and there is little possibility of RMB replacing to HK$. At the same time, the CNH will provide more opportunities of investment for the international financial market and will enhance position of RMB in the international monetary structure.Section six discusses the expected risk of CNH. The expected risk in CNH has two main causes which are the policy orientation and the market expectations. The difference between offshore and onshore price is an important reason for the expected risk of the policy orientation. The expected appreciation of RMB is more important for CNH, but it can cause some risk. The risk of CNH includes the risk of speculative arbitrage, the risk of short-term cross-border capital flows, the drop of the monetary policy effectiveness, the risk of the refinancing game and the other risks in the process of building CNH. The basic idea of preventing the risk of CNH includes the reducing the differences between the offshore and onshore price, promoting the deepening of the mainland market-oriented interest rate and exchange rate formation mechanism reform, strengthening the monitoring mechanism and improving the market risk management.Section seven proposes the policy and suggestion for the development of CNH. CNH is an important way to promote the internationalization of the RMB, but it does not play a decisive role. The functional position of CNH reflects in three aspects: First, CNH is an important platform for creating and improving the RMB external circulation system promoting the process of internationalization of the RMB. Second, CNH is an important incentive to accelerate the opening of the RMB capital account. Third, CNH is an experimental field of the Mainland's financial reform. The policy and suggestion mainly involves two levels of four questions, they are the offshore financial infrastructure construction, the offshore RMB interest rate system, the RMB backflow mechanism and RMB capital account opening up. The offshore infrastructure construction includes the market trading system, the payment and settlement systems, the support and the security system. Offshore RMB interest rate market is very necessary. For the offshore RMB backflow channel construction, it should continue to promote the RMB settled, RQFII, the inter-bank bond market and other backflow channels. At the same time, the capital account openness is an important mean to promote the development of CNH and internationalization of the RMB. It could achieve the effective supervision by understanding of the regulation, the improving of the regulatory approach and the participation of the regulatory body.