Arthur Kroeber

For a while, China’s Renminbi or Yuan looked like a potential competitor in international markets. But China has lost that opportunity, says economist Arthur Kroeber in OZY. “Who’s going to issue or buy bonds in a market where liquidity can be turned off at the drop of a hat?” he asks.


Global use of the renminbi would reduce exchange rate risks for Chinese companies and minimize exposure to sharp drops in dollar liquidity — one driver of the fall in Chinese exports during the financial crisis.

“There was both an objective to use renminbi internationalization as a wedge to drive finance sector reform, but there was also a very strong and widely held view that having a more fully independent currency was really important to secure China’s economic sovereignty,” says Arthur Kroeber, managing director of research company Gavekal Dragonomics.

Zhou (Xiaochuan, then governor of the People’s Bank of China)’s initiative came at an awkward time. Despite having a large economy, China had neither deep financial markets facilitated by an open capital account nor widespread confidence in its currency — elements deemed “fundamental determinants” of international currency status by Harvard economist Jeffrey Frankel.

Yet the central bank pushed on, creating an offshore market for renminbi debt centered in Hong Kong. By 2014, annual offshore issuance had climbed to Rmb112 billion ($16 billion), according to Dealogic. The offshore exchange rate is independent of the controls used by the central bank on the onshore rate, which limits moves against the dollar to 2 percent in either direction of a daily fix.

But in August of 2015, the central bank set the daily fix sharply weaker, inducing a shock devaluation in the normally stable onshore rate. Global markets convulsed and the offshore rate pushed below its onshore counterpart, spurring massive capital outflows on fears of a further sharp depreciation. Ultimately, Beijing tightened capital controls to stem renminbi outflows, which cut off liquidity to the offshore market.

Kroeber contrasts this move to the U.S. decision in the 1960s not to throttle the nascent eurodollar market when an offshore pool of dollar liquidity began ballooning in Europe. China’s decision stabilized the renminbi, he said, but left it bereft of credibility as an international financial currency. “Who’s going to issue or buy bonds in a market where liquidity can be turned off at the drop of a hat?” he asks.

This year, offshore renminbi bond issuance totaled just Rmb16 billion ($2.3 billion) at the end of September compared with onshore issuance of Rmb4.5 trillion ($635 billion), Dealogic data show.

More in OZY.

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