PBoC announces pilot programme for offshore yuan trading in Shanghai

At last week’s annual Lujiazui Forum in Shanghai, central bank governor Pan Gongsheng announced several incremental reforms designed to boost international use of the yuan. The measures included a pilot programme allowing China’s five big state-owned banks, along with the state-owned CITIC Bank, to engage in offshore yuan trade in the Shanghai free trade zone. Media reports claimed trading commenced immediately following the announcement. Prior to the announcement, currency traders in mainland China could only trade in onshore yuan (CNY). All yuan trading outside mainland China is conducted in offshore yuan (CNH). Most trading of offshore yuan is conducted in Hong Kong.

Governor Pan also told that Shanghai’s new role as an offshore yuan hub will be strengthened through the development of offshore financial services and bonds. In addition, a Digital Yuan (e-CNY) International Operation Centre has begun operating in Shanghai. The centre aims to promote international use of the PBoC’s digital currency. Domestically, the e-CNY remains in the pilot phase, while its international applications are still under testing. China’s long-term goal of making Shanghai an international financial centre faces many challenges, including China’s own constraints on capital movements and the yuan’s regulated exchange rate. Nevertheless, Shanghai’s role as a yuan trading hub may increase in the future.

The PBoC also launched a new repo facility to promote international investment in yuan assets. The facility is aimed at foreign central banks and other official institutions, allowing them to pledge the holdings of Chinese government bonds or other high-quality yuan assets in exchange for yuan liquidity from the central bank. The facility promotes the use of Chinese government bonds for investment purposes and improves yuan liquidity.

Pan also discussed current efforts to develop China’s domestic monetary policy framework, noting that the 7-day reverse repo rate already serves as the key policy rate in practice. The central bank aims to shift to a more price-based monetary policy. This would entail increasing the emphasis on short-term central bank operations and reducing the role of the quantitative policy instruments.