The key issue is that the new trade has created a wedge between the government-controlled, onshore exchange rate (CNY) and the offshore currency as it trades in Hong Kong, which is known as CNH.
Offshore currency centers, generally set up in places beyond the reach of U.S. or European law enforcement, can serve as middlemen between criminals and the mainstream financial world, brokering transactions that turn illegally obtained money into seemingly legitimate cash.
Exporters are struggling and some are moving production offshore because of the currency issue.
Fewer smuggled imports means less hard currency stashed offshore.
There are limitations locally because of the measures and so the market is likely to migrate offshore to hedge its currency position to protect against dollar weakness for portfolio investments, currency speculation, and foreign trade.
The extraordinary downdraft in the dollar suggests big multinationals must benefit from currency translation of offshore earnings, at least through yearend.
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As part of the effort to expand the market's investor base beyond Asia, the proposed bond may join a handful of yuan deals already listed on the London Stock Exchange, which is striving to become an offshore hub for the Chinese currency, another person said.
European investors are taking a bigger bite out of dim-sum bonds, giving a fillip to the swelling offshore market in China's currency.
The first offshore stocks to be denominated in Chinese currency will, in all probability, be issued this year.
Their aims were to make it harder for short-term portfolio investors to sell their shares and reap the proceeds, and for offshore hedge funds to drive down the currency.
But London is growing faster than other financial centers, such as Singapore, as a hub for offshore yuan payments, including payments for currency trading, imports and exports, and dim-sum-bond settlements.
Under the rules of the fund, institutional and individual investors raising capital in the Chinese currency, the yuan, from offshore markets like Hong Kong will be able to make direct investments in China.
It would then arrange to have an equivalent amount in foreign currency deposited in the client's accounts offshore.
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For some reason, they prefer informal channels, such as Internet-based firms that accept cash offshore and issue friends and relatives back in Zimbabwe with local currency or vouchers for supermarkets.
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That, along with the development of the offshore yuan market, will likely lead to the yuan becoming a new global reserve currency at some stage.
Mr. Chan predicted that the next phase of offshore yuan trade would involve "more balanced flow between the mainland and Hong Kong, " with Chinese currency moving in both directions as more Chinese exporters ask to accept yuan in payment for their goods from overseas buyers.
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As expected, Brazil imposed a 6% financial transactions (IOF) tax on offshore loans as part of a series of planned measure to curb inflation by limiting credit, and keep the local currency in check.
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