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In the past two decades China’s ­economy has grown on average by 9.8 per cent per year in real terms, overtaking Japan as the world’s second-largest economy.

A natural trend for its currency, the renminbi (Rmb), is to become more widely used for trade and investment. Around 10 per cent of China’s trade with the rest of the world was settled using Rmb last year. However, the Rmb is still not freely convertible. China has a controlled floating ­exchange rate system and there
are still repatriation and foreign ­exchange restrictions in place.

The so-called ’internationalisation’ of the Rmb has been gradual but significant, driven by a partial liberalisation of the regulatory regime and also by strong investor demand for the currency, which has generally been considered undervalued.

This liberalisation really began in 2004 when Hong Kong banks were permitted to provide Rmb deposits, exchange, remittance and credit card services to personal customers. By November last year there was an estimated Rmb630bn (£63bn) deposited in Hong Kong.

There has been a number of ­developments to permit offshore Rmb capital-raising, starting in 2007 when Chinese banks were first ­allowed to issue offshore Rmb bonds and reaching a high point in 2010 when there was a string of high-­profile Rmb issuances in Hong Kong, including those by the first corporate issuer (Hopewell) and the first ­multinational issuer (McDonald’s).

Other regulatory developments ­include an expansion of the cross-border trade settlement scheme and the lifting of restrictions on interbank transfers in Hong Kong.

Political will underlies the march of the Rmb. China’s 12th five-year plan supports explicitly the development of Hong Kong as an offshore centre for Rmb business. In August 2011 China’s vice-premier Li Keqiang, while visiting Hong Kong, announced a scheme for allowing ­investments in Chinese equities and fixed income through Rmb-qualified foreign institutional investors ­(RQFIIs). The RQFII scheme rules were published on 16 December 2011, leading to the granting of between Rmb900m and Rmb1.3bn in Rmb quotas each in respect of 21 Hong Kong subsidiaries of Chinese funds and securities houses - another ­significant milestone. The scheme is likely to be expanded further.

Most recently we have seen ­approval granted in January for 10 Chinese banks to issue Rmb25bn in dim sum bonds, while in another first a Chinese power company has been given permission to borrow Rmb from Bank of China in Hong Kong.

Three conclusions can be drawn. First, despite turmoil in Europe’s ­financial markets and a weakening of the view that Rmb appreciation is a one-way bet, the development of the offshore Rmb market will undoubtedly continue in 2012. Second, ­although controlled, China will allow increasingly varied securities and ­investment product offerings in Rmb. Third, Hong Kong will continue to be the testing ground for this process, facilitating the internationalisation of the currency while ­boosting its global financial role.