Since the beginning of this year, the continuous depreciation of the renminbi (RMB) exchange rate and its related effects have become important concerns of the monetary policy authorities. The RMB exchange rate in the offshore market is even more drastic and has worried the market. Due to the existence of international short-selling forces, many people are rather unhappy about the RMB offshore market, which is considered to be the "culprit" of the decline of the RMB exchange rate. This has also led the relevant authorities to intervene frequently the offshore market through measures such as issuing government bonds, central bank bills, and restricting the cross-border movement of the RMB, in order to maintain the stability of the RMB exchange rate.

The current intervention of the central bank has had an immediate effect on the stability of the offshore RMB exchange rate; the market also affirmed the increase in the asset variety of the offshore market and believed that it would contribute to the improvement of the market system and products. However, the direct involvement of the central bank in market transactions means that the central bank is the "dealer" in the offshore market, which will affect the formation of the price of the offshore RMB market. In the long run, the central bank's intervention in the offshore market would be draining the money, and further reduce the size of the RMB market in the Hong Kong market. Therefore, this has returned to the most fundamental question: what kind of offshore market does China need to build in the long term?

Anbound believes that China still needs to focus on the long-term prospects of RMB internationalization to promote the construction of offshore markets. If RMB is to become an international currency, it should be similar to the U.S. dollar and the euro. There are many overseas RMB markets, such as Hong Kong, London, and even Central Asia, which can develop and build offshore RMB market.

Looking from the development of the major currency offshore markets, the offshore market should be international markets. The emergence of the offshore market is an innovation in the modern financial industry. The trading activities of the currency in the offshore market can break through the limitations of time and space, making the flow of funds more rapid, the allocation of resources more efficiently, and the opening up a country's economy and finance; it is also the sign of increasing influence of a country. The development of the offshore markets of the U.S. dollar and the Japanese yen happens with the expansion of the U.S. economy after World War II, and the economic take-off of Japan, which has grown stronger in the process of gradually strengthening the influence on the international economy of the two countries, forming a place for investment and trading of international investors that echoes and complements the onshore market. It can be said that the construction and expansion of the offshore RMB market should be an important part of the internationalization of the RMB and part of the further opening of the Chinese economy.

First, this requires the accumulation of a considerable amount of RMB overseas to increase the breadth and depth of the offshore market. Since the establishment of the offshore RMB market in Hong Kong in 2009, the scale of offshore RMB in Hong Kong has fluctuated greatly with the trend of the RMB exchange rate. During the appreciation of RMB, it reached the peak of 2014 and exceeded RMB 1 trillion. However, with the decline of the RMB exchange rate, by September 2018, it has shrunk to RMB 600 billion, a reduction of 40%. In fact, the consideration of a stable RMB exchange rate for short-term concerns requires an expansion of the offshore RMB scale. In the case of a shrinking RMB pool, it is actually more likely to trigger speculation and market manipulation. On the other hand, the export of RMB to the offshore market in the onshore market can effectively promote the large-scale marketization of the offshore market. Because of fear of speculation, blocking the cross-border movement of the RMB should not be a long-term solution.

Second, maintaining investment participation and activity in the offshore RMB market should be an important target and indicator for the development of the offshore RMB market. While the offshore central bank bill introduced by the Chinese central bank has added an RMB investment vehicle to the offshore market, it is also a controlled reservoir and regulator. The establishment of such a tool is based on short-term considerations of the RMB exchange rate. However, in the long run, if the tools controlled by the central bank are too strong and excessive, the activity and participation of the offshore market may decline. The reason for us to mention this is not to deny the offshore bill but to emphasize the need to promote the internationalization of the RMB from a long-term perspective. If the RMB is to be truly internationalized, the exchange rate must be free floating. Then, the tools aimed at adjusting the exchange rate would be of no use.

The development of the offshore market also needs to be promoted by the market itself, and artificial interference should be reduced. Historically, the European dollar offshore market has emerged, and international political and economic factors have contributed to natural production. After the Second World War, the U.S. aid program and the trade surplus had made a large number of dollar outflows; the obstacles for the return of the U.S. dollar, and that some countries would not want to be controlled by the U.S. had formed the offshore market in Europe. After the 1970s, the expansion of international trade and investment, and the increase of the oil dollar made the offshore financial market in Europe continuously expanded and improved, forming a multi-level and diversified product structure to meet different capital needs. Currently, London has become the world's largest foreign exchange trading center; this is attributed to the active dollar offshore trading market, and its trading volume is higher than the U.S. itself. Therefore, from this perspective, the cultivation and development of the offshore market also need to respect the choice of the market, and should not overly emphasize regulation and guidance. In particular, if the market forms a one-way expectation, forced intervention can only produce short-term effects that cannot last long.

Final analysis conclusion:

As more and more countries begin to use RMB as the settlement currency, and the degree of internationalization of RMB continues to deepen, it will require the development of the offshore market to promote the RMB from being the settlement currency to an international investment currency, and enable global capital to participate in China's financial market resources.