A Study On The Monetary Supply And Demand And Balancing Mechanism Of The CNH Market

The CNH market sees rapid development in recent years. CNH deposits have been rising. RMB-denominated cross-border trade settled in Hong Kong has been increasing annually. Numerous RMB financial products are now available in the CNH market. Hong Kong has become the biggest offshore RMB capital pool, and a hub for global RMB offshore business.The development of the CNH market is of great significance to RMB internationalization. The CNH market can be seen as a testing field for RMB internationalization, a greenhouse for financial products in a liberalized RMB market, and a chrysalis for an internationalized RMB. The CNH market offers a capital market for RMB-denominated trade settlement. It is instrumental to the forging of market-oriented interest and exchange rates, and can provide useful experience for the development of Mainland financial market. Through the CNH market, we can observe what problems we may meet during the RMB internationalization process and what measures we may take. Also, currently, Shanghai is promoting the construction of China (Shanghai) Pilot Free Trade Zone, which includes the development of offshore finance. But Shanghai has little experience in this regard. Shanghai needs to learn from other cities. Hong Kong is a pioneer in offshore finance. Shanghai will benefit a lot from Hong Kong’s experience in developing the CNH market.The development process of the CNH market can be roughly divided into three periods. The first period, which is before 2008, is the preparation stage. In this period, focus is on personal and bond businesses. The period between 2009 and mid-2011 can be viewed as the formation stage. In this period, the CNH product system has been established. The period from August 2011 to the present can be called the overall construction stage, in which CNH backflow and investment channels have been broadened.The CNH market is consisted of CNH money market, security market, foreign exchange market, insurance market, etc. With the rapid expansion of the CNH market, CNH backflow channels have also been broadening. Current backflow channels include trade settlement, investing in domestic interbank market, RMB FDI, RMB-denominated bond insurance, RQFII, carrying in by tourists, etc.Currently, RMB-denominated trade settlement of Mainland importers is the main channel for RMB inflow into Hong Kong. The imbalance between the RMB off-shored by Mainland importers and the RMB on-shored by Mainland exporters determines most of the flow supply of new CNH deposits. The historical accumulation of these net flows determines the momentary stock of CNH deposits. The demand for CNH deposits is mainly driven by speculators who want to profit from anticipated RMB appreciation. The balancing process of the CNH market is the interaction of CNH demand and supply. In this process, RMB appreciation (depreciation) anticipation and the spread of CNH over CNY vs. USD is the fundamental driving force.Empirical studies on CNH deposits show that the spread of CNH/CNY vs. USD Granger-causes the fluctuation of CNH deposits. Factors such as RMB-denominated cross-border trade settled in Hong Kong and RMB appreciation (or depreciation) rate have significant influence on CNH deposits.Certain realistic and potential risks are posed by the rapid development of CNH market. As realistic risks, the development of CNH market may exacerbate the cross-border movement of "hot money", may have negative impact on the domestic financial sector and may facilitate money laundering. As potential risks, the development of CNH market may cause the deterioration of China’s net international investment position, may have negative influence on the effectiveness and independence of China’ monetary policy. These risks should receive enough attention and should be coped with as early as possible. Possible measures include promoting the optimization of the structure of RMB cross-border trade settlement, further broadening CNH backflow channels, strengthening anti-money laundering cooperation between Hong Kong and the Mainland, and exploring the reform of Hong Kong’s financial system.