The impacts of RMB internationalization on onshore and offshore RMB markets

• Published date: 01 September 2023
• Author: Yang‐Chao Wang,Jui‐Jung Tsai,Shushu Li,Yiying Huang
• Date: 01 September 2023
• DOI: http://doi.org/10.1111/irfi.12406

ORIGINAL ARTICLE

The impacts of RMB internationalization

on onshore and offshore RMB markets

Yang-Chao Wang

1

| Jui-Jung Tsai

2

| Shushu Li

1,3

| Yiying Huang

1

1

Newhuadu Business School, Minjiang

University, Fuzhou, China

2

Straits Institute, Minjiang University,

Fuzhou, China

3

Financial Economics, University of

Nottingham, Nottingham, UK

Correspondence

Jui-Jung Tsai, Straits Institute, Minjiang

University, Fuzhou 350108, China.

Email: juijungtsai@foxmail.com

Funding information

National Office for Philosophy and Social

Sciences (National Social Science Fund of

China), Grant/Award Number: 19BJY260

Abstract

Using the DCC-GARCH model, this study considers distinc-

tive features of China's foreign exchange market to investi-

gate the impacts of RMB internationalization on exchange

rates in onshore and offshore markets in different stages

during 2010–2017. The results show that policies con-

cerning RMB internationalization, such as interest rate liber-

alization, exchange rate liberalization, and capital market

internationalization, have different impacts on the central

parity rate, onshore exchange rate, and offshore exchange

rate. In terms of exchange rate liberalization, as the daily

trading band was gradually widened in 2012–2015, the

onshore exchange rate followed the offshore exchange rate

more closely. The central parity rate functioned as a man-

aged floating role. It stabilized onshore and offshore

exchange rate fluctuations, while allowing partial marketiza-

tion. After the exchange rate reform on August 11, 2015,

the central parity rate plays a benchmark role based on a

more market-oriented price formation mechanism. It makes

the central parity rate regain pricing power in onshore and

offshore markets. Further, it promotes exchange rate liber-

alization and RMB internationalization. Nevertheless, with

the slowdown of China's economic growth and the

narrowing of the interest rate differential between China

and the US, the RMB is under pressure to depreciate, and

its volatility increases significantly.

Received: 20 January 2021 Revised: 1 September 2022 Accepted: 19 November 2022

DOI: 10.1111/irfi.12406

© 2022 International Review of Finance Ltd.

502 International Review of Finance. 2023;23:502–523.

wileyonlinelibrary.com/journal/irfi

KEYWORDS

foreign exchange rate, offshore market, onshore market, policy

and regulation, RMB internationalization

JEL CLASSIFICATION

G00, G10, G18

1|INTRODUCTION

On November 30, 2015, the Executive Board of the International Monetary Fund (IMF) stated that the renminbi

(RMB) is considered a freely usable currency and would be included in the Special Drawing Rights (SDR) basket. On

October 1, 2016, the RMB officially became the fifth largest currency of the SDR, symbolizing the continuous

advancement of RMB internationalization towards becoming a reserve currency. These events reveal a profound

change in the pattern of the world economy. The voice of the largest emerging economy, China, has begun attracting

more attention from international multilateral institutions and countries around the world. The IMF's acceptance of

the RMB marked the first time since 1999 (when the Euro replaced the Mark and the Franc) that the IMF adjusted

the components of the SDR basket. The RMB, the fifth currency comprising the third largest proportion of the SDR

basket, accounts for 10.93%, along with the US dollar, the euro, the Japanese yen, and the British pound at 41.73%,

30.93%, 8.33%, and 8.09%, respectively. This move by the IMF is highly symbolic: the RMB has received approval

from the IMF as a potential reserve currency.

A series of RMB internationalization policies issued by the Chinese government are supported by their

corresponding institutional background and phased policies. With the gradual increase of economic and trade part-

ners after China's accession to the WTO, the RMB exchange rate regime, initially pegged to the US dollar and

evolved to reference a basket of currencies, saw an increase of exchange rate flexibility since 2005

(Thorbecke, 2019). During the US subprime crisis and the European debt crisis, China's capital market was not fully

opened and was able to avoid a serious financial crisis. However, due to the doubts regarding the international mon-

etary system at that time and the demand for international status, the necessity of RMB internationalization became

increasingly apparent (Aizenman, 2015). Since then, China has strengthened infrastructure construction related to

RMB-denominated transactions and the guidance of preferential policies. Particularly after the Belt and Road Initia-

tive was proposed in 2013, the level of China's regional economic and trade cooperation has greatly strengthened,

effectively improving the use of RMB in international trade (Zhang et al., 2017). The “811 exchange rate reform”in

2015 made the RMB central parity formation mechanism more market-oriented. China has steadily reduced restric-

tions on RMB investment and appropriately opened the stock, bond, and futures markets while focusing on macro-

prudential supervision. With its managed, steady, and rapid development, China has attracted many countries and

regions to use the RMB as a reserve currency. The process of China's RMB internationalization, represented by the

RMB's inclusion in the SDR basket in 2016, is reshaping the global foreign exchange market.

In recent years, China has been urging RMB internationalization by promoting RMB's international settlement,

investment, and reserve functions, and many government policies have affected China's foreign exchange market

(Ding et al., 2020). First, to promote RMB's international settlement function, the Chinese government has

implemented many measures, such as the construction of the offshore RMB clearing center, the expansion of the

Cross-Border Trade RMB Settlement Pilot Project, and the establishment of the RMB Cross-border Interbank Pay-

ment System (CIPS). Second, measures including the RMB Qualified Foreign Institutional Investor (RQFII) scheme,

Shanghai–Hong Kong Stock Connect, and Bond Connect are intended to strengthen RMB's international investment

function (Chen & Pan, 2021). Third, the Chinese government has gradually promoted interest rate liberalization,

exchange rate liberalization, and capital account convertibility, which are conducive to enhancing RMB's interna-

tional reserve function. However, these policies have direct and indirect impacts on onshore and offshore RMB

WANG ET AL.503