China's Pivot to Global Portfolio Investments through Index Inclusion: A New Chapter of Currency Internationalisation

Abstract

This study analyses how China has engaged and aligned with a new foreign interest in renminbi internationalisation through global allocations in onshore Chinese financial assets, thereby increasing global acceptance of the renminbi as a potential investment and capital currency. The analysis has two major implications. First, the expanding offshore renminbi investment infrastructure, namely Stock Connect and Bond Connect, has enabled China to accommodate large-scale global portfolio investments in its domestic financial markets, without relinquishing its fixed exchange rate regime or having to make various concessions to align with the domestic financial market. Second, the pull effect of index inclusion attracts an expanding base of international investors to Chinese financial assets, from which the process of renminbi internationalisation has benefited. However, geopolitical tensions between China and the home states of the leading foreign portfolio investors could well disrupt the market forces supporting such coordination between China as a currency-issuing state and foreign investors as private currency users, the disturbance of which has increasingly extended to the capital markets.