Europe Likely to Become the Second Largest Offshore Market for the Yuan

During the World Economic Forum annual meeting held from January 21-24， the Peoples Bank of China （PBC） signed a memorandum of understanding with the Swiss National Bank， agreeing to jointly establish an offshore yuan market in Zurich. At the same time， a consensus was reached on yuan clearing and settlement arrangements in Zurich. The World Economic Forum also saw an agreement regarding the inclusion of Switzerland into the Renminbi Qualified Foreign Institutional Investors （RQFII） pilot program with an investment quota of 50 billion yuan （$8 billion）. All these are paving the way for molding a European offshore yuan market.

A complete inflow and outflow mechanism is the precondition for the yuan to become a global currency. During the process of the yuans internationalization， efforts should be made not only in setting up offshore yuan settlement centers to facilitate its outflows but also in establishing efficient yuan backflow channels to smooth its circulation. Among the major yuan backflow channels， RQFII has further pushed forward the opening up of the domestic securities market， diversified the investment channels for offshore yuan and fulfilled the overseas demand of investing in the domestic securities market. As of the third quarter of 2014， the approved amount of RQFII has reached $280 billion， according to statistics from the PBC.

So far， Hong Kong has been the largest and the most competitive offshore yuan market across the world. Over the past years， cross-border yuan settlements in major Asian countries and regions， such as Singapore， Japan， South Korea， Hong Kong， Taiwan and Macao， have accounted for three quarters of that on the Chinese mainland. As the yuan goes further overseas and the One Belt and One Road initiatives are pushed forward， Europe is increasingly likely to become the second largest offshore yuan market.

Sino-EU trade has doubled in the past decade and reached $615 billion last year. In 2013， the two sides jointly formulated the China-EU 2020 Strategic Agenda for Cooperation that involves more than 100 sectors， and have agreed to launch bilateral talks on investment agreements and raise Sino-EU trade to $1 trillion by 2020. To this end， we should build a broad channel to interconnect European and Asian countries including China.

China has been committed to promoting the use of the yuan in Europe. Since the beginning of 2014， the nation has signed yuan settlement agreements with Britain， Germany， Luxembourg and France. Britain， Germany and France have obtained RQFII quotas of 80 billion yuan （$12.8 billion） respectively. Counting in the agreement just signed with the Swiss central bank， there have been five offshore yuan centers in Europe.

Meanwhile， a yuan currency-swap network covering the EU is taking shape. As more and more countries and regions are affected by the aftershocks of the global financial crisis， central banks tend to sign more currency-swap agreements. Since the beginning of 2014， China has reached such deals with New Zealand， Mongolia， Argentina， Switzerland， Sri Lanka， South Korea， Russia and Thailand， with a total amount of 850 billion yuan （$136.15 billion）. Since 2008， the PBC has signed currency-swap agreements with 28 countries， with a total amount exceeding 3 trillion yuan （$480.5 billion）

To boost the yuan to become a global currency， China has been engaged in making yuan settlement arrangements， checking and approving RQFIIs and sealing up currency-swap deals with European and other Asian countries. In the future， China will build currency-swap fund pools for the yuan to fend off external risks. Such pools can substantially expand the“yuan-to-other currencies” swap， clearing and settlement system and enhance the clearing function of the yuan.

More specifically， in direct bilateral settlement and financing activities， China should encourage indirect bilateral swaps to clear the“dollar trap” and give a leg up to the yuans internationalization.