Beijing has published rules to govern how foreign companies can bring offshore yuan funds into China for investment, a move that nudges the Chinese currency one step closer to a more prominent international role.
Yuan-denominated bond issuance has sprung to life in Hong Kong over the past year, with foreign companies from McDonald’s to Caterpillar tapping the so-called “dim sum” bond market.
But faster growth has been stymied by the hurdles that foreign companies face in channeling the cash to their mainland operations, with Chinese regulators closely guarding the country’s capital account to prevent hot money from entering the economy.
With the rules published on Friday by the Chinese central bank and commerce ministry, foreign companies will have long-sought clarity about the approval process and the offshore yuan market will have a more solid foundation for future expansion.
“Previously, the key thing was how do you generate more usages for this money sitting offshore,” said Kelvin Lau, an economist with Standard Chartered in Hong Kong. “One of the key functions that Hong Kong will increasingly serve is to become a capital-raising hub for offshore renminbi.”
Yuan deposits in Hong Kong have reached 609 billion, more than six times the level at the start of 2010, but the growth of assets, including dim sum bonds, has been much slower, making it hard for banks to manage their burgeoning liabilities in the Chinese currency.
Slower yuan deposit growth in Hong Kong in recent months has also fanned questions about whether Beijing was tapping the brakes on the offshore yuan market, wary of ceding too much control over its currency.
However, the clarification of investment rules implies that Beijing is indeed comfortable with the pace of change and is committed to its stated objective of internationalizing the yuan, Daniel Hui, an HSBC strategist, said in a note.
“China is slowly but surely closing the circle for the global circulation of the renminbi,” he wrote.
A firm grip on the capital account has been one of China’s main ways of insulating its economy from the volatility of international markets, a policy which has served it well since the outbreak of the global financial crisis.
But Beijing is slowly relaxing its controls in order to promote its currency as an alternative to the dollar. A more international yuan would make global trade and financing cheaper for Chinese companies and potentially be a source of diplomatic strength for the Chinese government.