Cross-border foreign trade operations have been hampered by exchange rate differences and high costs of transit and exchange all year round. Many export merchants’ hard-earned profits from accepting orders are often spent in cross-border exchange and transit.
During the Lujiazui Forum, the central bank finalized new opening-up measures, launched a pilot program for offshore RMB foreign exchange special transactions in the Shanghai Free Trade Zone, selected six mainstream banks to liberalize offshore foreign exchange trading authority, and relied on local official trading platforms to directly meet global offshore trading needs.
This financial adjustment directly addresses the pain points of cross-border trade operations. It not only optimizes the daily settlement and operating environment of foreign trade companies, but also promotes the expansion of the cross-border use of RMB from the bottom of the transaction. It is truly related to the operating income of cross-border practitioners and also affects the long-term international development space of RMB.
In the past, offshore RMB foreign exchange transactions mostly relied on overseas OTC markets to complete quotation transactions. It was difficult for major domestic banks to directly participate in offshore bilateral market making. Information on exchange rates in the onshore and offshore markets was fragmented, and price differences frequently fluctuated.
For foreign trade companies to make cross-border collections and payments, and for overseas institutions to invest in RMB assets, the exchange process requires detours through overseas transit agencies. This adds to the triple losses of transit fees, fund transfer cycles, and instantaneous exchange rate fluctuations. Small and medium-sized foreign trade companies have weak ability to resist risks, and the uncertainty of large-scale cross-border operations continues to rise.
RMB funds held overseas lack standardized transaction hedging channels, and the efficiency of offshore RMB revitalization is low, further limiting the popularity of RMB in cross-border trade and investment scenarios.
This new policy has targeted the above-mentioned blocking points. The central bank has authorized six institutions, including ICBC, Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications and CITIC, to enter the pilot platform of the Shanghai Free Trade Zone to carry out offshore RMB foreign exchange transactions. All businesses are connected to the China Foreign Exchange Trading Center’s standardized system to complete transaction registration. Transaction compliance and capital security are more guaranteed.
The five major state-owned banks immediately completed the first day of actual trading. ICBC took the lead in launching continuous bilateral quotations, opening trading channels to peers from many countries around the world, covering more than ten types of mainstream and emerging market currencies, and fully opening the full-process trading business of spot, forward, and swaps.
Agricultural Bank of China integrated its domestic branch dispatching capabilities with overseas outlets to connect resources, streamlined cross-border transaction execution links, and successfully launched multiple offshore exchange businesses corresponding to physical trade backgrounds on the first day.
Bank of China focuses on cooperating with overseas cooperative institutions along the Belt and Road to implement the first inter-bank offshore transaction, taking into account the urgent needs of trade settlement along the route.
China Construction Bank simultaneously participated in market quotations and completed the first batch of transactions, laying a solid foundation for market participation.
Bank of Communications expands multi-currency offshore hedging transactions to meet the diversified hedging needs of cross-border enterprises.
CITIC leverages its joint-stock cross-border business advantages to undertake the exchange needs of various overseas small and medium-sized institutions, enriching the overall market participation level.
Industry practitioners have intuitively felt the changes. Many foreign trade practitioners in the Yangtze River Delta have reported that in the future, they can rely on the Shanghai Free Trade Zone pilot channel to directly handle offshore exchange and exchange rate hedging operations, eliminating the need for overseas transfer steps. The comprehensive cost of exchange will be reduced, the efficiency of fund collection will be improved, and the bargaining power for accepting orders will be stronger.
Financial industry practitioners interpret that leading local institutions directly participate in offshore market making, which can transmit real supply and demand information in the onshore market in real time, narrow the onshore and offshore exchange rate spreads, suppress abnormal speculative spread fluctuations, and make the overall foreign exchange operating environment more stable.
With the normalization of transactions, the operational procedures for exchange and hedging of RMB assets by overseas central banks and various overseas investment institutions have been simplified, concerns about holding RMB assets have diminished, and new long-term RMB allocation funds will gradually increase.
The six pilot institutions will continue to expand the transaction scale, develop simple exchange rate hedging products suitable for small and medium-sized foreign trade entities, continue to expand the global cooperative trading network, and focus on serving the cross-border business needs of entities.
With the implementation of supporting RMB liquidity support mechanisms, the stability of RMB supply in the offshore market has been improved. Shanghai has gradually built an independent and mature offshore RMB trading ecosystem, and has steadily moved towards becoming a global core city for RMB asset allocation and risk management.
The core change of the pilot program for offshore RMB foreign exchange transactions in the Shanghai Free Trade Zone is to transfer some core links of offshore RMB foreign exchange transactions to the domestic formal system and change the old pattern in which overseas markets alone dominated offshore pricing.
Cross-border foreign trade companies directly reap the practical benefits of reduced exchange costs, accelerated capital turnover, and closer risk-avoidance channels, and the room for operational error tolerance is further relaxed.
The comprehensive threshold for overseas capital to participate in RMB-related investments has been lowered, the willingness to hold and use RMB in the long term has steadily increased, and the application scenarios of RMB cross-border trade settlement and cross-border investment have continued to expand.
At the macro level, we should enhance the ability to independently regulate cross-border capital flows, buffer the external impact caused by violent fluctuations in the international foreign exchange market, and lay a solid foundation for the smooth operation of the foreign trade export industry.
The Shanghai International Financial Center has made up for key shortcomings in offshore foreign exchange transactions, and its global financial voice has steadily increased.
After the pilot has accumulated mature operation experience, market participants and trading varieties are qualified for further expansion, and the physical foundation for RMB internationalization will continue to be consolidated. The RMB’s global influence will be steadily expanded based on the stable foreign trade fundamentals. Practitioners in the upstream and downstream of the cross-border industrial chain can also continue to share the development dividends released by financial openness.
