Developing Domestic Offshore Finance to Meet the Needs of the Real Economy
Author: GAO Hao, DENG Zhichao and XU Lei
In recent years, there has been a gradual upsurge in the international use of RMB in China's real economy, leading to a growing potential demand for offshore RMB international settlement, deposits and loans, and other financial services. Against such a background, the development of domestic offshore finance with RMB as the main transaction currency is beneficial to meet these financial needs and promote the high-quality development of the real economy. The key to developing domestic offshore finance in China is to deeply understand the needs of the real economy, vigorously develop offshore RMB businesses and products, build an offshore RMB financial system, facilitate the global layout of China's real economy, and steadily advance the internationalization of RMB.
The Necessity of Developing Domestic Offshore Finance
After more than 40 years of development since the reform and opening up, a large number of powerful multinational enterprises have set their sights on overseas markets and are actively engaged in global expansion, which has generated a significant demand for offshore financial services, such as offshore RMB payment and settlement, investment and financing, risk management, and business consulting. While China's capital account is not yet fully open, developing domestic offshore finance to facilitate RMB circulation between onshore and offshore markets is conducive to facilitating the global layout of China's real economy, and steadily advances the internationalization of RMB. This makes China's trade with the world more controllable and less prone to losses, enhancing China's financial security while also providing alternative options for other global economic entities. At the same time, it lays a solid foundation for further opening up China's financial sector and building a nation with a strong financial sector.
Analysis of Offshore Financial Demand in the Real Economy
The demand of the real economy is the ultimate driving force for the development and innovation of finance. Considering that domestic offshore finance is dominated by RMB transactions, in accordance with the theory of money demand, the real economy's demand for offshore finance can be divided into transaction demand, precautionary demand, and investment and financing demand. Among them, transaction demand and precautionary demand are direct demands generated by the development of the real economy, while investment and financing demand is an indirect demand that arises concomitantly. These three types of demand interact and promote one another, and all of them need to be fulfilled to form a closed loop of offshore RMB flows and reinforce the sustainable and healthy development of the domestic offshore financial market.
Analysis of the real economy's transaction demand for offshore finance
The transaction demand for domestic offshore finance primarily stems from offshore trade, especially the demand from enterprises for offshore RMB settlement transactions. This demand comes mainly from two types of enterprises. Firstly, Chinese enterprises seek global expansion and require overseas funding. As the reporting currency of the parent companies of these Chinese enterprises is RMB, such enterprises have a natural demand for offshore RMB transactions in terms of ease of pricing and usage. Particularly, with the rise of cross-border e-commerce in recent years, characterized by small and high-frequency transactions, traditional cross-border finance is struggling to meet their transaction demand. Secondly, foreign-funded enterprises focus on strategic deployments in China. These enterprises have often been based in China for many years, with their main business in the domestic market and their business scope concentrated in Asia. For them, the RMB is the main trading currency, while the US dollar and other foreign currencies become relatively minor currencies, leading to a strong demand for offshore RMB transactions.
However, due to the current insufficient supply of offshore RMB trading systems within the country and the limited international financial services capabilities of Chinese financial institutions, most of the aforementioned transactions occur overseas (e.g., China's Hong Kong and Singapore), replacing domestic offshore RMB transactions and leading to an outward shift in domestic demand. Considering that the main business of these enterprises is domestic, if high-quality offshore financial transaction services can be provided domestically, enterprises would be willing to set up settlement centers in China's pilot free trade zones to achieve efficient business linkage, convenient management, and cost savings.
Analysis of the real economy's precautionary demand for offshore finance
The domestic real economy's precautionary demand for offshore finance is mainly reflected in enterprises' hedging for international business and insurance demand in sectors such as construction engineering and shipping logistics. As of March 2024, the number of countries and regions where China's non-financial ODI has reached 147, showing a trend of spreading investment from Europe and America to the Belt and Road countries. Some countries have political instability, large exchange rate fluctuations, and severe market regulations, leading to higher country risks that greatly increase the uncertainty faced by Chinese enterprises in overseas investment. For example, after the COVID-19 pandemic, the rise of protectionism in some African countries led to contract disputes and profit repatriation issues for Chinese enterprises investing in Africa. Similarly, India has taken administrative measures against certain Chinese enterprises. When investing in these regions, Chinese enterprises have a higher demand for hedging and insurance.
Currently, China's external economic focus is shifting to regions such as ASEAN, Africa, and the Middle East. However, there are relatively few RMB-denominated hedging products available on the international market. Developing the domestic offshore financial market and enriching RMB hedging products can effectively enhance the offshore risk management capabilities of Chinese enterprises going global. At present, most of the offshore insurance products required by Chinese enterprises going global are provided by European and American insurance providers, with Chinese insurance institutions holding a small market share and offering lower-quality policies. Urgent action is needed to develop comprehensive offshore shipping insurance and reinsurance products that leverage the domestic offshore financial market.
Analysis of the real economy's investment and financing demand for offshore finance
Developing domestic offshore finance needs to focus on the direct demand of the real economy, such as trade settlement and direct investment, while also taking into account the demand for indirect investment, such as asset transactions. Traditional theories suggest that transactional and precautionary demand are the basic demands of currency, and investment and financing demand is derivative demand, i.e