China has taken a significant step towards yuan internationalization. The People’s Bank of China (PBOC) launched a pilot program enabling six major banks to conduct offshore renminbi transactions from the Shanghai Free Trade Zone. This initiative marks a shift in policy, allowing banks including Industrial and Commercial Bank of China and Bank of China to execute offshore yuan trades without routing through Hong Kong or Singapore.
For years, China maintained a separation between onshore (CNY) and offshore (CNH) yuan markets, with tighter capital controls on the former. PBOC Governor Pan Gongsheng announced the program at the Lujiazui Forum, expressing aims to deepen the foreign exchange market and promote integration of the yuan ecosystems.
With offshore yuan trading rates at multi-year highs, demand for CNH transactions is rising. The initiative is expected to enhance liquidity in the CNH market and reduce costs by allowing onshore banks to trade directly, diminishing Hong Kong’s long-held advantage as the gateway for these transactions.
The move forms part of China's broader strategy for yuan internationalization, including the establishment of the Cross-Border Interbank Payment System and the digital yuan pilot. Notably, this announcement does not address the status of cryptocurrency trading within China.