Hong Kong's Offshore Renminbi Forex Market: Past, Present, and Future
Hong Kong's offshore renminbi foreign exchange market has become an integral part of the international foreign exchange market after years of development. The market will continue to facilitate Hong Kong as an international financial center and be a critical role in renminbi internationalization.
The outline of the 14th Five-Year Plan clearly states that the status of China’s Hong Kong (hereinafter referred to as Hong Kong) as an international financial center and a global offshore renminbi business hub. Hong Kong，as the main business hub for offshore renminbi foreign exchange，is home to the most comprehensive offshore renminbi clearing infrastructure，sound legal system，and talents superiority. All of which have given Hong Kong a clear and unique edge in terms of the scale and depth of the offshore renminbi forex market. Regarding market development，the offshore renminbi market matured from non-deliverables to deliverables，from base products to derivatives，and from short maturity products to long maturity ones.
Spot Forex Market for Offshore Renminbi
As the institutional arrangements for cross-border renminbi business evolved，the offshore renminbi spot forex market has undergone three stages: incubation，rapid development，and further maturing.
Incubation (from 2003 to 2009): at this stage，the cross-border renminbi business was focused on the retail market. On November 19，2003，the People's Bank of China (PBC) and the Hong Kong Monetary Authority (HKMA) signed a memorandum of cooperation that allowed banks in Hong Kong to take renminbi deposits，exchanges，bankcards，and remittances. The Bank of China (Hong Kong) was designated as the clearing bank for renminbi businesses. The world's first renminbi clearing system gradually came into shape.
Fast development (from 2009-2015): at this stage，cross-border trade settlement in the renminbi became the main driving force for renminbi internationalization. The pilot cross-border renminbi business was launched on July 6，2009. The liberalization of cross-border renminbi trade settlement policies and the strong appreciation expectations of the renminbi at that time incentivized international investors to offshore renminbi funds. Thus，the renminbi rapidly flowed into Hong Kong through corporate cross-border trade channels.
Since the implementation of the “8.11” foreign exchange reform in 2015，market factors have played an even more prominent role in the renminbi exchange rate formation mechanism，and the flexibility of the renminbi exchange rate has significantly increased. In October 2016，the renminbi was officially added to the Special Drawing Rights (SDR) basket，accelerating the internationalization of the currency and bringing new opportunities to the renminbi forex market. As China’s mainland accelerates the opening up of its financial market，the renminbi plays a greater role in meeting the demands for international payments and global asset allocation. The demand for offshore foreign exchange grew due to financial opening-up initiatives such as the Stock Connect，the Bond Connect，and the Swap Connect.
Offshore Renminbi Forex Derivatives Market
Forex Forward Swaps
In the offshore forward market，renminbi non-deliverable forward contracts，for example，renminbi non-deliverable forwards (NDFs)，are one of the earliest products. NDFs are not delivered on the maturity date. Its gain or loss is based on the difference between the forward exchange rate and the underlying spot exchange rate and is cleared through rollover in the local or foreign currency.
Since 2009，as the offshore renminbi pool grew and the offshore renminbi bond market developed，the yield curve of the offshore renminbi has been gradually improved，enabling the development of deliverable forward swaps. In February 2010，the HKMA announced the inflow of the renminbi into Hong Kong. From then on，banks under HKMA jurisdiction may conduct renminbi business according to Hong Kong regulations and market factors，as long as the business involves no return of funds to the China’s mainland. Banks may issue renminbi certificates of deposit or launch renminbi forward contracts in Hong Kong with prudent risk management measures. Since then，a number of financial institutions have started continuous quotations for offshore renminbi deliverable forwards of multiple maturities，and the trading scale and market liquidity of the renminbi offshore deliverable forwards market has rapidly expanded.
The offshore renminbi foreign exchange forward and swap market have developed to the point where deliverable forward swaps have dominated the market. In practice，deliverable offshore renminbi forward swaps are the main channel for market players to finance in the renminbi money market. Market participants swapping the US dollar for the renminbi is equivalent to a lending transaction with US dollar cash as collateral，lowering credit risks and use of transaction amount limits. In particular，short-term fund financing has become on