How China limits the use of Chinese currency.
Currency
control takes two forms, administrative control, and market-based control.
Administrative control, the government restricts currency transaction like
transfers through prohibitions, approval procedures, and explicit quantitative
limits. The administrative is the form of control China has of its currency.
One of the ways China controls money is by regulating all trading inside the
country between foreign currencies and the RMB. The Central Bank of China is
under the guidance of the Polit Bureau which means that it does not have
liberty to make any decisions without consulting the Polit Bureau which is part
of the central government. The government also regulates all this trades
through licensing businesses involved. The other way is by cutting or restricting
connections between offshore and onshore market. The Chinese exporters pay in
U.S dollars, but they are not allowed to keep the dollars. The government
requires them to exchange the foreign currency for the RMB using the official
exchange rates set by the PRC. Therefore, all the hard-currency earnings from
the massive exports of China are handed to the government. The government also
adopted a policy of gradually developing trading using yuan, however
restricting the flow of yuan getting out of China (Xiao and Kimball, 2).
Difference between the RNB, the CNY, the CNH, and the CNY-NDF
Renminbi
(RMB) is the official name for the Chinese currency while Yuan is the unit of
the currency just like the pound is the unit for the currency sterling. CNY and
CNH are both codes for Yuan but differ in their usage. CNY is the code used
onshore and can only be traded mainland. CNH, on the other hand, is the
offshore code for the Yuan currency and is traded outside China. The CNY is
under strict control from the PBoC regulating its movement, the CNH, on the
other hand, is not controlled strictly and is allowed to move freely. CNY-NDF
is the Non deliverable forward contracts traded on the offshore market,
therefore, using the CNY (Hastings).
Significance of the McDonald’s bond issue
One of
the main reason why the McDonald’s bond was of such significance is that it is the
first ever issue to be dominated in RMB by non-Chinese and non-financial firm
at the global market in the Dim Sum Bond market. It was also a sign for the
global companies which would want to operate in China, that they have a chance
to fund and run businesses in Chinese RMB. It also signified the start of a new
funding way for international companies operating in Hong Kong to raise capital
for their businesses operations. The issue was also important because it would
be a crucial contribution to the development of the off-shore RMB debt capital
market (Kuo and Smith).
Will the RMB become a truly global currency?
The RMB
would become a global currency if there were no restrictions by the Chinese
Government. The limitations are the onshore and the offshore differences in
currency, capital market restrictions and the difference in treatment for
non-residents, where international organizations/firms are highly restricted
such that there is no easy way on utilizing the currency like in any other
country while favoring the local companies. The Chinese government also has no
intentions of making their currency a global one, especially as a reserve
currency. Therefore any hopes on this, are extinguished.
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